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cANNOUNCING THE THIRD 
DARTNELL SALES SURVEY. 


Competitive 
Trade Practices 


of 


In Ten Loose-Leaf Sections 


oy 


Compiled and Published by 


THE DARTNELL CORPORATION 


1801 LELAND AVENUE, CHICAGO 
342 MADISON AVE., NEW YORK 


A Nation-wide Survey Covering 230 Lines of Business 


Competitive 
Trade Practices 


editorial staff, under the direction of J. C. Aspley, editor 

of “SALES MANAGEMENT” Magazine. The first 
survey was made in 1918 when it became evident that the 
European conflict would soon end, necessitating a complete 
readjustment of sales practices and radical changes in sales 
policies. The work was undertaken at the request of the old 
International Sales Managers’ Association, and was used by 
various local organizations for the purpose of round table dis- 
cussion. The loose-leaf form, and sectional arrangement, was 
designed for that purpose. 


Cpe is the third nation-wide survey by the Dartnell 


Rapid Sales Expansion When the after-the-war boom 
During 1920 Makes showed signs of bursting in the sum- 
Organization the mer of 1920 sales managers found 
Most Urgent Problem themselves with flabby sales organ- 

izations, which had grown Topsy-like 
during the seller’s market. It was apparent to all that without 
better supervision and organization these sales machines would 
fail miserably when the load was thrown upon them. Once 
again Dartnell was requested, this time by the Los Angeles 
Sales Managers’ Association, to undertake another survey, so 
that sales managers could have full and up-to-date information 
about all that was new and best in sales organization. 


In making this second survey the organization plans of 2,500 
concerns were investigated. The results of the survey were 
released to subscribers in the fall of 1920 just as the break came. 
They proved of inestimable value during the trying days of 1921. 
This survey was used during the fall of that year at the meet- 
ings of nearly every important sales managers’ organization in 
the country. 


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Conditions Which In the three years that have elapsed 
Make a Third Dartnell since the second Dartnell survey, a 
Survey Needed new problem, of far-reaching and 


serious import, has taken form. It is 
the problem of excessive selling costs. These costs’ have 
mounted steadily since 1920. 


The report of the Joint Committee on Marketing and Distri- 
bution, of the Sixty-seventh Congress (in spite of its agricul- 
tural origin by far the most extensive investigation of distribu- 
tion methods ever attempted), states: “We have now reached 
a point where it costs more to distribute and serve than it does 
to produce. Commodity values are lost in a maze of service 
costs, and the time has come for a consideration of the funda- 
mental problem of the distribution of the absolute essentials.” 


Congress is beginning to echo with talks of the “inefficient 
competitive system” and the “capitalistic method of distribu- 
tion.” The senator from Iowa returned from Europe and pub- 
licly announced his intention of “fighting” for the general adop- 
tion of the Rochdale plan of distribution, which has grown so 
popular on the continent. A judge of the United States Circuit 
Court of Appeals is responsible for the amazing statement that 
“advertising is a method of selling goods, which, without in- 
creasing their merit, increases their price.” The Congressional 
Record is full of ballyhoo about the seven salesmen who call for 
each order, 


Even admitting that this is but the loose talk of political ad- 
venturers it nevertheless reflects the public temper. The fact is 


‘that consumers feel that the price of what they buy and the price 


of what they sell are badly out of line. They are being told 
that excessive distribution and service costs are to blame. 


Competitive Trade It is no idle bromide to say that 
Practices Responsible these high selling costs must be 
for High Selling Costs brought down. Sales managers are 

agreed upon that. But how to bring 
them down is a puzzle indeed. It is evident that competition is 
not going to diminish in the next decade. In an analysis re- 
cently made by Julius H. Barnes, president of the United States 
Chamber of Commerce, it was found that in the two decades 
between 1900 and 1920 the volume of industrial production 


2 
534-715. . 


nearly doubled. This was actual quantity, not value. In the 
same period the population increased only forty per cent. In 
other words, our manufactures over a normal period, prior to the 
war boom, grew ‘twice as fast as our population. With immi- 
gration curbed, it is not likely that this ratio will diminish. 

Surplus\ production necessarily means a highly competitive 
market. In the struggle to survive it is only natural that a great 
many practices are bound to develop—many of which, while 
producing some immediate business in the long run will seriously 
hurt your business, and greatly add to the cost of selling. Some 
are already in evidence. . 

Take the tire field for example, it is difficult to say where the 
deluge of secret rebating and price cutting now in vogue will 
land this industry unless curbed. In the grocery field free deals 
are being resurrected. In the paint field all sorts of subterfuges 
are worked to get dealers to switch lines. In other fields sales 
costs are climbing as a result of spreading sales effort out too 
thin—attempting to cover too large a territory. In others profits 
are seeped away because the line is too large. 

There is hardly a field that is not suffering from short-sighted 
practices; where efficient practices are being sidetracked because 
of short-sighted sales generalship. 


Order in Which It is the purpose of this survey to find out 
Data Will Be what these practices are, how they have been 
Presented used and what the immediate and long- 

distance results have been. When this infor- 
mation has been assembled it will be presented to subscribers in 
the form of ten loose-leaf reports or “sections.” These sections 
will be issued every other week, and arranged for loose-leaf 
filing in a special ring binder. The binder will.be equipped with 
a tabbed index, for the proper classification of the material which 
will roughly be divided into the following subjects: 


Section One—Rebating Schemes and Price Manipulation 


“Trade-in” allowances and policies in various lines and 
what is being done to circumvent the evil—Store fixtures 
and displays as a form of rebating—lIs it a good policy to 
pay for window displays?—Some phases of outright sales 
bribery—Advantages and dangers of guaranteeing prices 
against decline. 


Section Two—Advertising and Freight Allowances 


Tabulation of freight allowance practices by lines of busi- 
ness—When, if ever, is a freight allowance justified ?— 
< | Danger from spreading sales effort out too thin—Is it 
= wise to undertake selling the consumer or the dealer for 
customers ?—Using the advertising appropriation for sub- 
rosa price cutting—Should manufacturers pay for demon- 
strations in dealer stores? 


Section Three—Cancellations and Returned Goods 


Cancellation and returned goods policies as a factor in 
meeting competition--What steps should be taken to 
guard against cancellations?’—Plans for keeping dealers’ 
shelves clear of spoiled or unsalable goods—Better sales- 
manship as a cure for the abuse of the return privilege— 
Dangers of various dumping plans in vogue—The abuse 
of the guarantee. 


Section Four—Trial and Consignment Selling 


p Under what circumstances is selling on trial justified >— 

% Percentage of.sales developed by various trial selling 
plans—Experience of concerns who formerly sold trials 
but who now sell outright—Phases of consignment sell- 
ing—lIs it sound practice to use consignment plans to 
dislodge competitor’s line?—Glaring examples of disas- 
trous effects of over-doing consignment selling. 


Section Five—Discount Rates and Terms of Sale 


Tabulation of discount rates (cash and trade) and pub- 
lished terms of sale in major lines of business—Is the 
importance of quantity discounts over-rated ?—Methods 
of obtaining a larger unit of sale without the use of quan- 
tity discounts—When customer takes unearned discount— 
Advantages and disadvantages of long term billing— 
Plans for selling on installments. 


» 


Section Six—Premiums and Special Trade Inducements 


Use of premiums to dealer clerks and jobbers’ salesmen 
to get them to push your product to the exclusion of com- 


4: 


petitors—Do so-called “free deals” pay and, if so, under 
what conditions ?—‘“Free Deal” plans in use—Experience 
of concerns who pay part of buyers’ expenses to come to 
market, compared with experience of those who do not 
grant such allowances. 


} 


Section Seven—Pooled Shipments and Split Deliveries 


Should the manufacturer or jobber encourage pooled buy- 
ing by quoting extra discount on such purchases ?—Prac- 
tices, and reasons for them, of various concerns regarding 
taking large orders at a quantity price and delivering in 
partial shipments—What can be done to get trade to 
forego hand-to-mouth buying?—Warehousing as a sub- 
stitute for pooled shipments. 


Section Eight—Mail Order Houses and Buying Syndicates 


Growth of mail order houses, and the effect of this growth 
on “legitimate” distributors—Under what conditions 
should they be sold branded products, and at what dis- 
count?—When a mail order house catalogues your prod- 
uct without your knowledge and undersells your estab- 
lished trade—Recent development of buying syndicates; 
should they be given an extra discount, and if so, how 
much? 


Section Nine—Exclusive Agency Arrangements and Agreements 


Various ways exclusive agency contracts are used to shut 
out competition in spite of existing laws and activity of 
Federal Trade Commission—Under what conditions is the 
granting of an exclusive agency justified?—“Dual 
Agencies” as a substitute for the exclusive agency— 
Resume of experience of concerns who have discontinued 
selling through exclusive agencies, and reasons for mak- 
ing the change. 


Section Ten—Unfair Competition and Petty Bribery 


When a competitor starts insidious propaganda about 
your company or your product—Patent infringement suits 
and litigation for sales purposes—Plans that are in use 


5 


2 


to meet substitution by dealer and jobber—Is palm- 
greasing ever warranted ?—When a competitor hires away 
your best salesman. 


Suggestions for To get the full benefit out of the material 
Using the embodied in the different sections of this 
Data survey the reader must look for fundamental 


ideas rather than for ready-to-use ideas. 
Every business is hedged in by certain peculiarities. No two 
businesses are alike, any more than any two people are alike. 
What may be food for one may easily be poison for another. 
The fundamental principles of organization, are however, quite 
similar in every sales force. By reading between the lines of 
these reports you should be able to find many fundamental ideas 
which can readily be adapted to your peculiar requirements with 
a little reshaping. The measure of what you will get out of this 
survey, will therefore largely depend on the thought that you 
put into it. One man will take these sections and see nothing of 
value to him in them.. Another man, possibly in the same de- 
partment, will take the same matter and find hundreds of prac- 
tical ideas, all of which have cost some one much time and money 
to develop and test, and any one of which might sre: be worth 
a fortune to the business. 


The Three Dartnell Surveys 


Survey No. 1—Made 1918-—-(Reissued and Revised 1921) 


c/Modern Sales Management Practices 


Burroughs Adding Machine Co. 
method of fixing sales task on basis of 
potential sales possibilities of given ter- 
ritories. 


Working description of the Task and 
Bonus plan as worked out and used by 
Libby, McNeill & Libby and other con- 
cerns. 


Leading questions used by United 
Cigar Stores Company in_ selecting 
salesmen. 


Analysis of various types of bonus 
and profit sharing plans in use with 
detailed description. 


Method of Holeproof Hosiery Com- 
pany, International Silver Company 
and others in using guarantee. 


Policy of Trenton Potteries Company 
which has resulted in greatly cutting 
down returned goods losses. 


Description of methods employed by 
National Cash Register Company to 
standardize sales story. Analysis of 
various sales manuals. 


How . Sherwin-Williams, American 


Optical Company and others are sys- 
tematically gathering data for sales 
expansion programs. 


Survey No. 2—Made 1920 
Sales Organization Methods 


Experience of various concerns in 
selling direct and in selling through the 
jobber. Conditions under which direct 
selling is justified. 


How to determine the point of di- 
minishing returns in redistricting sales- 
men’s territories. How large should a 
territory be? 


Tabulation by lines of business show- 
ing number of customers a salesman 
calls upon; average number of salesmen 
handled by branch manager, etc. 


Analysis of policy used by 150 con- 
cerns (names given) in regard to su- 
pervision sales manager has over adver- 
tising. 


Maps showing how concerns with 
varied sized sales organizations divide 
the country up into sales divisions and 
districts. 


Compensation and duties of division 
managers, branch managers, zone man- 
agers, etc. - 

Stimulating sales through the use of 
‘“block-men,” ‘‘pinch-hitters,”  ‘‘squad 
captains,” ‘“‘traveling supervisors,” etc. 

How various concerns handle in- 
quiries so as to make sure that sales- 
men get the most out of them. 

How to organize a statistical and 
sales research department with small 


expense. 


Survey No. 3—Made 1923 
Competitive Trade Practices 


What Is Being Done to Guard Against 
Cancellations? 


Methods of Sub-Rosa Rebating and 
Dangers of Various Plans 

Use of Premiums for Dealers and 
Dealer Clerks 

Advantages and Dangers of Installment 
Selling 

Plans for Financing Installment Busi- 
ness 


Do Free Deals Pay and, If So, Under 
What Conditions? 


Merchandising Plans That Capitalize 
the Guarantee 


Discount Rates and Terms in 250 Lines 
of Business 


Plans That Have Been Effective in 
Checking Substitution 

Exclusive Agency Arrangements and 
Agreements 

The Return Goods Problem—How It Is 
Being Met 

Should Mail Order Houses Be Sold— 
and At What Discount? 

Assortment Selling Plans 

Should Branded Products Be Sold to 
Owners of Private Brands? 

Handling Spoiled and Unsalable Goods 


Profitably 

Trial Selling As Opposed to Selling 
Outright 

Methods for Overcoming Jobber Indif- 
ference 


including Ring Binder, Set of 


Price of the above Surveys—$6.00 each jrjedine Rie Bind De) of 


SECTION ONE 


Rebating Schemes and Price 
Manipulation 
A Consideration of “Trade-in” Allowances, 


@ Giving Away Store Fixtures, Paying 
for Window Displays, Etc. 


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SECTION ONE 


Rebating Schemes and Price 
Manipulation 


A Consideration of the Advisability of “Trade-In” Allowances, 
Price Guarantees and Other Indirect Price Inducements 


As a Means of Meeting Competition 
Copyright, 1924, by J. C. Aspley 


The announcement by Procter & Gamble, the Cincinnati 
soap makers, that as a result of a change in trade practices, they 
have been enabled to guarantee forty-eight weeks a year steady 
employment to 3,500 workers is of much deeper significance 
than is generally appreciated. It not only shows the close 
relationship between trade practices and a more even volume 
of business, but it brings into sharp focus a problem which in 
the next ten years is going to be a burning issue in more than 
half the states of the union. 


One of the most damaging indictments which has been made 
of our existing capitalistic system is that it deliberately main- 
tains an army of unemployed. This is a Marxian theory that 
seems very plausible to the masses, particularly during a period 
of unemployment, and there are among our educated economists 
many who sincerely believe this to be true. In the last session 
of the Wisconsin legislature, a bill was introduced to compel 
employers to guarantee steady employment to workers. It was 
the contention of the sponsors of this bill that only through 
compulsion could manufacturers even out their production 
curves, and stabilize output. The bill, while defeated in com- 
mittee, is sure to come up again, and it is by no means improb- 
able that in time it will become a law in a number of states, in 
spite of its impracticability and in spite of the fact that its 
eventual purpose would be to drive industries and capital out of 
the state into the arms of its more conservative neighbors. 

The guaranteed employment plan announced by the Procter 
& Gamble people is unquestionably an attempt to correct a con- 


1 


Survey and Study of Competitive Trade Practices 
in 239 Different Lines of Business 


SECTION ONE REBATING SCHEMES AND PRICE MANIPULATION 


dition inwardly by better sales methods, and it should be care- 
fully noted that in his explanation of the new plan, William 
Cooper Procter specifically stated that it was made possible by 
the elimination of the jobber and by selling direct to the trade. 
Colonel Procter said in part: 


The “direct to retailer” selling policy has brought about an even 
flow of our business, eliminating the peaks and valleys in the sales 
chart thus making it possible for the plants and offices to operate at 
practically the same speed the year round. 

Previous to the adoption of the direct. selling plan it was not uncom- 
mon for jobbers to purchase heavily at certain seasons of the year 
making it necessary to operate the factories at high speed for a few 
months. ‘Then would follow the natural reaction while the heavy 
purchases were being consumed and during the depression it would be 
necessary to lay off thousands of employees thereby causing much suffer- 
ing and affecting to a more or less degree the social and economic 
conditions of the communities in which they lived. 


Sales Manager the Trustee for Present Industrial System: 
Passing over the controversial aspects of Colonel Procter’s state- 
ment, it is clear that the great problem of unemployment, upon 
which far-thinking economists tell us, our present industrial 
system may eventually founder, is a problem of sales manage- 
ment, fully as much if not more than it is a problem of produc- 
tion. If sales can be spread out more evenly, by the abolish- 
ment of certain practices, such as the employment of quantity 
discounts and the centering of sales effort in a few large dis- 
tributors, it is evident that a big step in curtailing unemploy- 
ment will have been taken. But on the other hand, if many of 
the prevailing practices which tend to increase the cost of sell- 
ing, and thereby undermine social relations, go unchecked, and 
even spread, no one dare predict what will happen. 


In the scramble for business which has already started, and 
which we must expect to become more bitter as the pinch of 
competition is felt, a great responsibility rests on the shoulders 
of the man responsible for marketing policies. Unfortunately 
your investigators in making this survey find that the average 
sales executive is not aware of his responsibility for the ultimate 
success of his business. Here and there we find men of long 
vision at the heads of big business who can see clearly that 
radical changes must be made in our trade practices, if our pres- 


2 


Survey and Study of Competitive Trade Practices 
in 239 Different Lines of Business 


SECTION ONE REBATING SCHEMES AND PRICE MANIPULATION 


ent system of distribution is to survive. These men are not so 
much interested in how much added sales a certain practice is 
going to produce this year, as they are in the effect of that prac- 
tice on their business twenty years from now. All too slowly 
this viewpoint is coming to the rank and file of marketing men. 


Cut Throat Practices in the Automobile Industry: As this 
is written there is general alarm in automotive industries over 
the excessive trade-in allowances made for old cars. Anticipat- 
ing unsettled prices due to a falling off of demand, manufacturers 
recognize that something must be done about prices. But they 
have divided themselves into two camps—one believing with 
General Motors that prices should be cut, without affecting 
established trade-in allowances, and the other believing that 
it is better business to leave the resale price alone, and do the 
cutting in the form of a wider allowance. The effect of this 
radically opposed policy on the man who is going to buy a new 
car 1s easy to see. He goes to the concern who is manipulat- 
ing its price by means of the allowance on old cars and receives 
a quotation. Then he goes to the concern who is operating on a 
smaller trade-in allowance and gets an offer considerably lower 
than the previous offer. The buyer jumps to the conclusion, in 
spite of all the salesman can say, that there are no standards 
of trade-in value and proceeds to play one concern against the 
other, with the result that the trading of an automobile has de- 
generated to a par with horse-trading. And the moral standards 
in selling automobiles are fast descending to equally low levels. 


“Trade-Ins” Responsible for High Prices: No less an 
authority on automotive selling than M. L. Pulcher, general 
manager of the Federal Motor Truck Company, states that for 
the year 1922 the sale of second-hand vehicles—both passenger 
cars and trucks—approximated $1,600,000,000. The value of new 
vehicles produced that year was $2,400,000,000. It is evident 
the practice is far more serious than generally realized. It is a 
tremendous factor in the high prices which afflict the automo- 
tive industry, when a list price is usually set at 100 per cent of 
the factory cost, meaning that it costs as much to sell and dis- 
tribute as it does to manufacture. This is economically wrong. 
The selling cost is twice what it ought to be because it usually 
requires two sales to market one new car. 


3 


Survey and Study of Competitive Trade Practices 
in 239 Different Lines of Business 


SECTION ONE REBATING SCHEMES AND PRICE MANIPULATION 


The practice is especially bad in the truck field. To quote 
Mr. Pulcher: ‘ 


Unless a dealer is very smart and has had considerable business 
training, he cannot make a success of the motor truck business. I 
believe that if a dealer was properly coached in regard to his operat- 
ing charges, that he would realize that a lot of these excessive trade- 
ins he makes, are all out of proportion to their value. In almost every 
case, with both dealers and branches, we find their capital stock, or 
equal to it, tied up in second-hand vehicles, for which there is no 
market. 

THrough these bad practices the selling fraternity has got in wrong 
with the bankers, and the bankers are not very enthusiastic over the 
truck business, and since about eighty per cent of the trucks are sold 
on time, this works a very great hardship on the industry. ‘The truck 
business for the last two or three years, has been a dog-eat-dog game, 
and the larger fellows with the greater financial responsibility have 
been the heaviest offenders. They, I believe, are beginning to realize 
that it just cannot be done. 

I have never heard of the Baldwin Locomotive Company taking 
in second-hand locomotives from the Pennsylvania Railroad in ex- 
change for new ones, with a small additional cash consideration. ‘The 
Pennsylvania Railroad do their own selling to the small lines, of the 
engines that are no longer useful to them. So should the truck operator 
use his truck until such time as it is ready for the scrap heap, and then 
resell it himself, or take his own loss. 

If the market for a second-hand truck was good, then the situation 
would not be so serious, but the second-hand market is not good and 
the truck must be sold on a time basis, which means that it must be re- 
paired and put into shape, so that it will outlive its time sale. The 
dealer often does this and takes an additional loss on the truck when he 
sells it, because he has put more into it than he can get out. 


The Jordan Plan to Stabilize Trade-In Allowances: Reput- 
able automobile manufacturers, and more especially bankers 
interested in the automobile industry, are awake to this condi- 
tion. Finding that the control of resale prices through means of 
published lists put out by local dealer’s associations worked 
only when business was good, the Jordan Motor Company, of 
Cleveland, this year adopted a plan of standardizing the trade-in 
allowance by means of standardizing the price at which second- 
hand Jordan cars were to be resold. 


“We do not believe that the buyer, or some other automobile 
dealer, has any more right to tell our dealers what price he will 


4 


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Survey and Study of Competitive Trade Practices 
in 289 Different Lines of Business 


SECTION ONE REBATING SCHEMES AND PRICE MANIPULATION 


pay for a used Jordan than he has to tell us what price to set on 
our new cars. We will spend as much money to advertise used 
cars as we spend to advertise new cars. The second-hand prob- 
lem has long been looked upon by many manufacturers as 
strictly a matter that the manufacturer should leave alone. We 
believe that it is a problem the manufacturer should concern 
himself with and make a part of his national sales policy.” 


In taking this stand Mr. Jordan has taken a leaf from several 
of the older industries, notably the office appliance field, where 
the standardizing of trade-in allowances has been effected. In 
the Jordan plan the aim is to rebuild the used car to conform 
to certain standards, and then to advertise those standards. In 
this way it is planned to create a market for second-hand Jordan 
cars that will warrant Jordan dealers paying top prices, due to 
their ability to quickly market the used cars. This plan seems 
sound. 


Wholesome Effect of Small Trade-In Allowance by Dealers: 
~The General Motors Company, as already noted, has been 
working steadily toward smaller trade-in margins particularly 
on Buick, Cadillac and Chevrolet models. While it is illogical 
to argue that the present satisfactory volume of business being 
done on these and its other makes of cars indicates the success 
of this policy, nevertheless the figures are not without sig- 
nificance in this connection, and are printed below. It should 
be pointed out that the increase in August sales over July, is 
undoubtedly a result of bringing out the new Buick models in 


July. 


1923 1922 
Jantiary., 2 0%- cdl, By cet ae I eee ee ee 49,162 16,088 
February *..2<.)2 ota ete teri ee cae tte Le erie 55,458 20,869 
March: ¢..22.0) 1 et eas ee eee hee er 71,698 34,082 
Aprils : pode og at Re pee Aa eee PE eee 75,854 40,074 
May. 6 van oiceily Sb TFA a MO dees anc oe 75,420 46,736 
JONES. so vik Bos he ees cee le oe aie ae 69,708 48,541 
Titiy 2 Le ee ee eee ae 51,657 33,772 
August's): ee ie er ee *6 5,000 42,840 
September’)! ..).)24 .a4 -Gdp 3 OE) Saree Shes ew: <r ors 35,443 
October’..k. bye» eh aed pee bean eee ree hee as 40,815 
November scx wick sR eek eee, CO eat Ay oaths ero tne 50,232 
December {occa eee Be ee cot eee ne ae 46,871 


*This preliminary figure of sales includes Buick, Cadillac, Chevrolet, 
Oakland, Oldsmobile passenger and commercial cars and GMC trucks. 


5 


Survey and Study of Competitive Trade Practices 
in 239 Different Lines of Business 


SECTION ONE REBATING SCHEMES AND PRICE MANIPULATION 


Control of Trade-In Allowance by Subsidiary Organizations: 
The manufacturers of standard typewriters have pretty well 
solved the trade-in problem by establishing trade-in allowances 
based on the serial number of the machine, and then disposing 
of the machines taken in trade through second-hand organiza- 
tions, directly or indirectly controlled by them. The Underwood 
Typewriter Company enter into definite contracts with re- 
builders to supply them with a given number of machines 
annually to rebuild. The Shipman-Ward Company of Chicago, 
large national advertiser, comes within this classification. It 
goes without saying that if these rebuilding concerns cut prices 
to a point where they seriously interfere with the sale of new 
machines, something will happen. 


It was formerly the practice of most typewriter concerns 
to rebuild and sell these machines through their regular sales 
organizations. If the salesman could not sell you a new ma- 
chine he would sell you a rebuilt machine for $65 on almost 
any terms. But this plan did not work out well. It undermined 
the morale of the men. It was natural that a salesman could 
not put up a winning fight for a new machine, if he knew at the 
time that he could, if necessary, sell him a rebuilt machine at 
two-thirds the price. 


How Multigraph Company Handles Second-Hand Problem: 
A still more interesting development in the problem of control- 
ling your second-hand market is the plan of the American Multi- 
graph Sales Company which operates a separate rebuilt division 
for this purpose. The rebuilt division operates under different 
management, has different offices, and is in every sense a dif- 
ferent organization from the parent organization. It makes no 
sustained attempt to create business, in the way that the parent 
organization does. In fact it has no extensive sales force, and 
makes very little effort to sell. Most of its business is secured 
from leads sent in by regular salesmen, and as the salesman 
forfeits his commission when he fails to sell a prospect new 
equipment, it goes without saying that he is not likely to turn 
over prospects until he has exhausted every possible argument 
in favor of their buying the new equipment. 


Because the “rebuilt” or second-hand division can be oper- 
. . . e 
ated at a minimum cost, the item of selling expense being low 


6 


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Survey and Study of Competitive Trade Practices 
in 289 Different Lines of Business 


SECTION ONE REBATING SCHEMES AND PRICE MANIPULATION 


and the item of rent being spread out over a large volume of 
business, it is able to compete with second-hand dealers very 
easily, and the plan, while by no means perfect, is a very excel- 
lent example of how a manufacturer can control the market 
for second-hand equipment. 


Separate Selling Organization Essential: In the light of the 
experience of the concerns quoted above, your investigators feel 
that the attitude heretofore held, that the disposal of second- 
hand products is not a factory problem is short-sighted. It 
should not be thrust off upon the dealer, on the theory that the 
loss comes out of his pocket. The solution to the problem in our 
Opinion is by means of a secondary sales organization, or at 
least a separate organization controlled by the manufacturer. 
It can be so organized and operated that it can dispose of the 
trade-in products at a top price, thus giving the manufacturer 
the advantage of being able to in turn offer more interesting 
allowances for old equipment. It has been demonstrated that 
such a division can be operated independently at a profit, if 
proper marketing methods are employed. It has likewise been 
demonstrated that through control of the second-hand market 
the sale of new equipment can be materially increased, and if 
the manufacturer is able to make larger trade-in allowances he 
makes it easy for his salesmen to sell new equipment, because 
the salesman can figure a higher second-hand value. Another 
factor that is worthy of more consideration than it is now receiv- 
ing is the incentive a larger allowance has to the user to bring 
his equipment up to date. It is evident that in nearly every 
line a great many customers are clinging to old, inefficient, half- 
satisfactory models for no other reason than they will not take 
what seems an unreasonable depreciation. Anything that a 
manufacturer can do to reduce this depreciation will conse- 
quently increase his good-will. 


II—Store Fixtures and Displays As a Form of Rebating 


Closely allied with the trade-in allowance in such fields as 
office and store equipment, automotive, home equipment and the 
like is the practice which seems to be growing in merchandising 
lines—(lines selling through merchants or dealers)—to manipu- 
late the price through furnishing dealers with expensive display 


7 


Survey and Study of Competitive Trade Practices 
in 239 Different Lines of Business 


SECTION ONE REBATING SCHEMES AND PRICE MANIPULATION 


cases, counters, and other forms of store fixtures in consideration 
of purchases of adequate size. 


These displays are charged against the advertising appropria- 
tion as a rule, and are not generally regarded as a form of 
rebating. They usually have some advertising on them, and in 
talking with dealers we find that they are regarded as an adver- 
tisement. One druggist in speaking of a show case put out by 
The Conklin Pen Company, spoke enthusiastically of the plan. 
On the whole, however, our inquiry shows that most plans of 
this kind, while they have succeeded in getting distribution, have 
had the effect of over-stocking the dealer and in many cases 
thereby sacrificing his good-will. In a check-up of seven drug 
stores using Conklin display cases, we found that in six out of 
the seven the case was used for competitive pens, and in some 
cases unbranded pens. It is reasonable to suppose that a man 
buying a pen from a Conklin case, would think he was buying 
a Conklin pen. If the pen did not give service the blame would 
be placed at Conklin’s door, /In two oft the seven storesstie 
show case had been shoved into the corner, and made a very 
unfavorable appearance. In another instance the glass had been 
cracked and had been pasted together with strips of adhesive 
tape. It looked most disreputable, and was certainly anything 
but a credit to the Conklin reputation. 


On the other hand a Dartnell investigator who made a survey 
of trade practices in New Orleans last summer, reports that a 
decided advantage is to be gained by using a display case deal 
in that territory. He found that the dealers there had been 
seeped in the custom of “lagniappe’ which translated means 
“something for nothing.” This is particularly true of the small 
dealer, and in getting distribution for a product among that class 
of trade in New Orleans, and other markets similarly consti- 
tuted, it is a distinct advantage to provide “something for 
nothing.” 

Speaking in general terms, however, we find the consensus 
of opinion in nearly every line approached leans strongly toward 
small initial sales, and against the use of expensive displays. The 
objection is first on account of the bad taste in the dealer’s mouth 
when left high and dry with an overstock, and second, that 
plans of this kind must necessarily divert advertising funds 
which might be utilized to create a consumer acceptance for the 


8 


O 


WHAT THE FEDERAL TRADE COMMISSION 
CONSIDERS UNFAIR TRADE PRACTICES 


In presenting this report to our subscribers 
we have disregarded the numerous rulings of 
the Federal Trade Commission covering compet- 
itive trade practices, bacause of the fact 
that the commission is continually reversing 
itself, or being reversed by the courts, 


The situation is such that a practice which 
might be ruled as unfair today -- such as the 
granting of quantity discounts for example -- 
might be regarded in an entirely different 
light three days from today. 


However, we do feel that it would be helpful 
to our subscribers, especially those who are 
using this survey in round table work, to have 
on hand a separate and independent digest of 
Federal Trade Commission rulings, so we are 
having Roy Johnson, of our editorial staff 

in New York, an authority on sales legisla- 
tion, review the recent rulings of the commis- 
sion and present them in tabloid form. 


Just as soon as Mr. Johnson completes his 
digest, it will be forwarded to you, in the 
proper size and style for filing with the 
other material to be issued in connection 
with this survey. 


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be 


Survey and Study of Competitive Trade Practices 
in 2389 Different Lines of Business 


SECTION ONE REBATING SCHEMES AND PRICE MANIPULATION 


proposition, if not an actual consumer demand. We found where 
one concern had spent in 1922 more than one-half of its appro- 
priation in putting out an elaborate counter display, and as a 
result its appropriation for consumer advertising that year had 
been cut in half. While the counter display worked out very 
well, so far as getting distribution was concerned, the slowing 
down of the consumer advertising caused the product to back-up 
on the dealer’s shelves. This year (1923) it was necessary to 
practically double the consumer effort in order to get the goods 
flowing freely in retail channels. It is reasonable to assume that 
the cost of the display plan was considerably more than it 
showed on its face, if this added advertising effort was taken 
into consideration. 


IIlI—Paying for Window Space As a Sales Inducement 


Another rebating scheme which is still used, particularly in 
important cities where window display space is in demand, is 
for the seller to agree to “rent” or “use” a dealer’s store window 
for a given period at a high rental on consideration of his stock- 
ing a certain amount of goods. When Cutex was first put on 
_ the market this plan was used with good results in getting 
Broadway distribution. While in this particular case the method 
was possibly justified, the plan on the whole is to be con- 
demned, for the same reasons that rebates in the form of display 
fixtures are to be condemned. ‘They have a tendency to create 
_ an artificial sales condition, and unless the window display has 
unusual consumer selling power, it overloads the dealer. If the 
window has such sales power all you have to do is to convince 
the dealer that the use of his window will sell a large amount of 
your product, and he will usually be agreeable to giving you the 
use of the window without “rent.” The exception to this rule, 
of course, is in cities where there are strong retail associations 
where the dealers have agreed among themselves not to give 
over windows to exclusive displays unless the manufacturer pays 
for the space. 

A much better method of handling window displays is to go 
to some organization like the Palmer Advertising Service of 
New York which is equipped to not only prepare window dis- 
play material, but to distribute it as well. The charges for 
this service, of course, vary with the nature of the material 


9 


Survey and Study of Competitive Trade Practices 
in 239 Different Lines of Business 


SECTION ONE REBATING SCHEMES AND PRICE MANIPULATION 


desired. A recent window display for Sealpax union suits, con- 
sisting of a large two-panel display, with a connecting arch, 
drawn by John Bradshaw Crandell, and beautifully lithographed 
was set up complete in 5,000 dealers’ windows for a cost of 
approximately $3.50 per window. This price, remember, not only 
included the window space, but also covered the cost of making 
the drawing, producing the display, and actually seeing that it 
was put up in the dealer’s window. When you consider that 
dealers estimate the value of their window space all the way 
from $25 a week up, and to that has to be added the cost of 
producing and putting up the window, it is evident that the 
largest part of whatever is paid dealers under the so-called 
“allowance” is purely a sales rebate. 


IV—Various Forms of the “Bonus” Discount 


The practice is general in some of the merchandising fields 
to build the selling plan around some rebating feature, which 
supplies the “something extra” inducement that salesmen in a 
closely competitive line are continually asking for. These prac- 
tices may take the form of dealer coupons packed with the mer- 
chandise, premiums packed with the merchandise, prizes for 
groups of dealers selling the largest volume of the product, extra 
cash discounts with free deals in other products, etc. With the 
prospect of increasing foreign competition, and the seeming 
advisability of making a temporary price concession to meet it, 
many manufacturers are now giving serious thought to this 
problem. Does it pay or doesn’t it? 


Appreciating the importance of the subject, and realizing that 
it has never had an unbiased discussion in trade magazines 
whose advertising interests lie along different lines, your inves- 
tigators have made a searching inquiry among users of these 
various premium plans, which information is still coming into 
our office. It will be digested and submitted to you as section 
six of this report. Present indications are that many of our 
sources of information have experienced excellent results from 
the use of this plan, when used judiciously. 


So in this section we distinguish between the use of premiums 
and premium coupons and confine ourselves to the use of cash 
bonuses; a case in point being a concern in the general supply 


10 


V <2 \ 


Survey and Study of Competitive Trade Practices 
in 289 Different Lines of Business 


SECTION ONE REBATING SCHEMES AND PRICE MANIPULATION 


field which offers a series of cash prizes to dealers who draw 
lucky numbers. In this campaign the salesmen told the dealer 
that at the end of the month a carbon of all initial orders from 
new customers received during the month were placed in a 
barrel, and the seventh, eleventh and thirteenth order drawn 
by a blindfolded stenographer would receive cash prizes ranging 
from $100 down. ‘This plan is in effect a form of lottery and in 
our judgment would conflict with the post office rulings, but as 
no consideration is paid for the purchase of lottery tickets, the 
point is debatable. In any event this concern carried the plan 
through, and a marked sales increase resulted. Another con- 
cern interviewed was considering the use of a similar plan, only 
it proposed to extend the idea to all orders (in this case the 
orders taken by the salesmen carry only one item). There are 
various other forms of giving cash bonuses, but all of them are 
based on the general idea of making the customer feel that he 
is getting something extra. 


Reasons for Calumet Baking Powder Company’s Opposition 
to Cash Bonus: We submit, after interviewing a number of 
prominent sales managers in the grocery and drug fields, that 


these plans are unsound; that they should be discouraged; and 


that they do not build a healthy foundation for future growth. 
The reasons have been well summed up by K. K. Bell, general 
manager of the Calumet Baking Powder Company, in a letter 
to his salesmen. We quote the letter: 


It was, until recently, the pride of the baking powder industry that 
throughout the keenest kind of competition, no baking powder manu- 
facturer of any consequence or standing resorted to price-cutting to 
meet or to defeat competition. Nineteen hundred and twenty-two 
marked the first price-cutting competition indulged in between rival 
baking powder manufacturers. 

The firm first to establish this pernicious precedent was the one 
probably least expected to do so. The trade was startled by the terms 
announced: 100 PER CENT FREE GOODS AND 10 PER CENT 
DISCOUNT. Without stopping to count the cost, many grocers who in 
days gone by had operated their store according to standard ethics— 
giving quality and service, and who had always zealously avoided 
engaging in price-slashing contests—were enlisted as price-cutters; so, 
before they realized it, they had joined the cut-price druggist and 
were debasing the standing and policy of their store by undertaking 
to induce trade on the mere basis of a deep cut price. Not a few 


11 


Survey and Study of Competitive Trade Practices 
in 289 Different Lines of Business 


SECTION ONE REBATING SCHEMES AND PRICE MANIPULATION 


were deluded by a clause in their purchase slip which permitted the 
seller to retain an option to take back the goods at cost if they so 
desired. Of course, no such desire ever developed, for the reason that 
only two things make price-cutting possible. One is to get rid of the 
“white elephant” item—something that no one wants and that no 
reputable grocer would offer the trade at regular prices. ‘The other is 
the highly standardized, staple product on which the price-cutter takes 
a loss in order to use it in attracting trade to his store. 

At least one other manufacturer of national scope was tempted to 
join this warfare, and offered special discounts ranging from 5 to 25 
per cent in restricted territories for a limited time; but Calumet was 
not frightened out of the territory, nor did we adopt the costly and 
ruinous tactics of the price-cutting manufacturers. 

The lesson learned by dealers, jobbers, and manufacturers has been 
worth all it cost. For more than a quarter of a century we have been 
advising our distributors to ignore the neighbor who sells “below cost.” 
The next sign which inevitably follows is the “For Rent’ card in the 
window. ‘That the same principle applies to manufacturers as well as 
retailers was proven by the flat failure of this price-cutting plan. The 
damage done the dealers was slight compared with the debasing in- 
fluence against the product in the mind of the consumer. We expect to 
be in business long after the creditors have given up all hope of ever 
collecting a dime from the concern who undertakes to rout us through 
price-cutting. 


Bonus Discounts Provoke Price Cutting: There is a big 
fundamental objection to the special bonus which should be 
clearly recognized, and that is the questionable effect of build- 
ing up a sales plan on a price basis. While it cannot be denied 
that price is a highly important consideration, particularly in 
the marketing of a product sold for resale, good practice requires 
that little emphasis be placed on price. The use of the bonus 
discount has just an opposite effect. The salesmen go out and 
build their whole sales talk on price. The dealer or buyer is 
impressed with the fact that he is getting a great deal for 
nothing. The size of what he is getting for nothing must neces- 
sarily be exaggerated in his eyes. It becomes very definitely 
fixed in his mind. It is only natural, therefore, when the goods 
do not move or when he feels the need of raising some quick 
funds, that the products which he feels he has purchased cheap 
are going to be those selected for slaughter. Price cutting in- 
vites price cutting, and any manufacturer or jobber who expects 
otherwise is flying in the face of nature. 


12 


a 


Survey and Study of Competitive Trade Practices 
in 239 Different Lines of Business 


SECTION ONE REBATING SCHEMES AND PRICE MANIPULATION 


On the other hand the product which is sold through empha- 
sizing its repeat qualities with only passing emphasis on the 
price, is unlikely to be subjected to this embarrassment and 
most likely to be spared by the dealer searching for “stupendous 
bargains” to advertise. It will not become the innocent by- 
stander in the warfare of unthinking tradesmen. But on the 
contrary, it will be respected and sold, not because it is cheap, 
but because the dealer has been taught to know that it brings 
satished customers back to his store. 


V—Guaranteeing Prices Against Decline 


The practice of protectine the dealer against a‘ decline in 
prices was an outgrowth of the price slump in January and 
February, 1919. In an investigation made by the editorial staff 
of ‘Sales Management” and reported in its February, 1919, issue 
under the caption, “The Falling Market Scare;” it was noted 
that “whenever possible the buyer is being protected against any 
further decline in prices. One of the big underwear concerns, 
noted for its ‘stand pat’ policy on cancellations is now accepting 
orders subject to cancellation, and is even going so far as to 
guarantee the dealer against loss through any further drop in 
prices. In the event that the price does fall lower, the company 
announces that it will accept the return of the unsold goods at 
invoice value.” 


From the textile field the idea spread into the automotive 
field, and soon many of the leading automobile manufacturers 
were offering various kinds of guarantees. In one case to our 
knowledge, an automobile manufacturer was forced to refund 
a great many thousand dollars, some reports placed the amount 
at $1,000,000, because of this policy. 


With the passing of the scare, and the advent of the better 
business period of 1919 and 1920 the practice disappeared. But 
its evil effects had been implanted on business, for in the slump 
of 1921 manufacturers were besieged by customers who de- 
manded as their right the cancellation of orders on the books 
and consideration for losses incurred by price reductions. The 
returned goods departments were working double shifts, and 
the sales manager was at his wits end. 


13 


Survey and Study of Competitive Trade Practices 
in 239 Different Lines of Business 


SECTION ONE REBATING SCHEMES AND PRICE MANIPULATION 


Just at present there is little demand on the part of buyers 
for protection against further price drops, but it is a condition 
which may be expected to arise the moment a falling in the 
market is evident. The question to be decided then will be how 
far the manufacturer or jobber should go in protecting his cus- 
tomers against loss due to heavy buying, and how far he should 
go in advertising that policy. 


It is interesting to note that in an investigation of this sub- 
ject. made by the Mederal (rade Commresion tn loz 
preponderance of manufacturers favored the plan. Out of 2,000 
questionnaires sent out, four hundred were returned marked 
“yes” or “no.” Of that four hundred two hundred and fifty 
voted “yes.” The remaining one hundred and fifty. voted “no.” 
This was three years ago, before the practice, then quite general 
and in its infancy, had been thoroughly tested. The investigation 
which we have made shows that the advocates of guaranteeing 
prices are becoming fewer, for out of forty concerns whom to our 
knowledge had guaranteed prices during the post war period, 
only fifteen were willing to admit that they found the practice 
desirable. 


Those who favor the plan contend that it has the advantage 
of spreading the carrying charge for a large inventory, and 
provides working capital. It is pointed out that the plan is 
equivalent to the seller borrowing money from his customers 
with which to carry his merchandise until the customer finally 
absorbs the high-priced inventory. There is always a chance 
that the goods will be sold if distributed in this way, whereas 
they may not sell if left in the manufacturer’s warehouse. 


Those opposed to the plan contend that it is unnecessary to 
make such inducements, and that if the right kind of a selling 
plan is used, the goods can be unloaded on the consumer, without 
encouraging the dealer to hold them in stock. He is encouraged 
to do so when the manufacturer stands ready to make good 
any losses resulting from his inability or incapacity to unload 
them from his shelves. These sales executives argue that the 
use of the guarantee against price decline enables the salesman 
to easily overstock a dealer, particularly where a quantity price 
is offered. The effect on the dealer having to carry that over- 
stock is bad. He loses respect for the product, and forms the 


14 


Survey and Study of Competitive Trade Practices 
in 289 Different Lines of Business 


SECTION ONE REBATING SCHEMES AND PRICE MANIPULATION 


conclusion that it is a poor seller. Eventually he returns what 
he has left unsold, and it is a very costly and difficult matter to 
reawaken his interest in the line. The seller gets back a lot of 
Shelf-worn stock which entails expense to market again, and on 
which he must take a price loss as well. If the product had been 
sold outright at the outset, it might have taken longer and it 
might have cost more money, but the goods would have been 
distributed in smaller doses, and it is more than likely they 
would have moved off the dealer’s shelves. 


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SECTION TWO 


Advertising and Freight 
Allowances 


Use of the Advertising Appropriation and Prepayment of 
_Freight as an Insidious Price Cutting Device 


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In accordance with our arrangement 
with those sales managers clubs 

for whom this survey is being made, 
the material will be forwarded in 
sections, as we gather it, so that 
it will be available for round- 
table discussion. 


As some of the clubs meet twice a 
month, and others once a month, we 
plan to forward a new section every 
other week or thereabouts. Individual 
subscribers will receive their copies 
of the sections the same day that 
they are forwarded to the clubs. 


This binder and index, with those 
sections thus far issued, are sent 

to you with the suggestion that you 
instruct some one in your office to 
watch for each installment of the 
survey and when it comes in to prompt- 
ly file it in this binder. 


/e NN 9 1 1993 


SECTION TWO 


cAdvertising and Freight 
Allowances 


Various Ways of Employing the Advertising Allowance to Meet 
Competition and Maintain Resale Prices. — When if 
Ever is a Freight Allowance Justified? 


Copyright, 1924, by J. C. Aspley 


In gathering the data for this section more than 1,100 sales 
executives were queried. Not only did your investigators make 
every effort to personally interview as many executives as pos- 
sible, but questionnaires were mailed out to several hundred 
picked subscribers to “Sales Management” Magazine. It was 
amazing how many concerns who pride themselves on their one- 
price policy, grant all sorts of allowances and concessions to 
meet “unusual’’ competitive conditions. 


Your investigators found one concern on the Pacific Coast 
which boasted of the fact that it “rigidly enforced all prices, 
and never deviated from ‘f. o. b. factory’ terms, no matter who 
the customer was or how urgent the circumstances.” Yet the 
general manager of that concern felt no compunction whatever 
in making an “advertising allowance” on certain brands of coffee 
which the company packed. 


“Advertising Allowance’ Coupons to Push Slow Brands: 
This concern specializes in packing coffee for private brand pur- 
poses. To quote the general manager: “As the customer for 
whom we pack the coffee does the advertising, we allow him a 
varying amount on different brands. This is not a camouflaged 
price cut, but it is just what it claims to be—the difference in 
price between our selling price and the selling price of competi- 
tors who advertise their own brands. It might be mentioned 
that we do not pack any goods whatever under our own name. 
The advertising allowance mentioned is the amount that we 
would ordinarily spend for advertising if we did any, but we do 
no advertising whatsoever. The advertising allowance is in the 


1 


Survey and Study of Competitive Trade Practices 
in 289 Different Lines of Business 


SECTION TWO ADVERTISING AND FREIGHT ALLOWANCES 


form of a coupon sent with the invoice, good for a certain 
amount of money per pound on the shipment covered by the 
invoice.” 


A somewhat similar plan is used by a meat packer. When 
competitive conditions require it this concern permits its sales- 
men to offer the dealer certain inducements in the form of an 
advertising allowance, which sum is charged against the general 
advertising appropriation. 


In return for this allowance the dealer agrees to push the 
product aggressively. In order to continue to receive the allow- 
ance he must buy a continually increasing amount of the prod- 
uct. The dealer is given to understand at the outset, that he is 
receiving an advertising allowance and not a rebate; that if he 
is to continue receiving it he must earn it, but the company does 
not attempt to specify how or when the allowance shall be spent. 
nor does it make any effort to determine how it was spent. 


The amount allowed differs with various products, according 
to the margin of profit. On one product it might be one cent a 
pound for a given amount used within a given period, and one 
and a half cents a pound for any amount in excess of that figure. 
Or the allowance may be limited to one special leader which the 
packer wished to push during a certain month. But always, be 
it noted, it was left to the salesman to decide when such an 
allowance should be made, how it should be spent, and whether 
it was to be continued. 


Use of Advertising Allowance to Maintain -Resale Prices: 
Another interesting use to which we found the advertising allow- 
ance being put was to effect the maintenance of resale 
prices. Under this plan the product is sold at a minimum price, 
allowing a small margin of profit, but not enough to permit 
profitable price cutting. If the merchant does not cut prices 
he is entitled, when the goods have been sold, to an extra adver- 
tising allowance. But if he cuts prices he sacrifices this adver- 
tising allowance. Under this plan, which is becoming widely 
used by concerns wishing to check price cutting, no refusal to 
sell is involved, to which the federal trade commission objects, 
and no effort is made to control the price after the title passes 
which the supreme court objects to. The principle is simple. 
There is no black list involved. The product is sold direct, and 


G) 
~ 


Ss 


Survey and Study of Competitive Trade Practices 
in 289 Different Lines of Business 


SECTION TWO ADVERTISING AND FREIGHT ALLOWANCES 


not through jobbers. The dealer has a perfect right to cut prices 
if he wants to. But the company justly contends that when a 
merchant cuts prices on those products on which it has built up 
a reputation, such action hurts the company in an advertising 
way, and the company is justified in withdrawing all advertising 
allowance from such accounts. Several plans of this kind are 
in use, and in some instances have been investigated by the 
Federal Trade Commission who have made no effort to stop 
the practice, and the impression is that it meets all their require- 
ments. 


Advertising Allowance As Exclusive Agency Bait: We 
found many instances of where a manufacturer would use an ad- 
vertising allowance as a substitute for an extra discount to get 
department stores to handle his product. This practice, of 
course, is quite general and under certain conditions justified. 
The same might be said of the prevailing tendency to share an 
advertising appropriation with large distributors, who handle 
the product on an exclusive distributor basis. The theory oi 
this form of allowance is that it connects the advertising with 
the source of supply. The same brief is offered by concerns who 
erant the customer’s request for special allowances for space in 
programs, joint newspaper advertisements, wall displays, etc. 
Those following that policy insist that inasmuch as a certain 
amount of money has been appropriated for advertising anyway, 
it is good business to use a part of it to please the trade. 
They contend that the money spent in this way results in better 
trade relations, puts the dealer under obligations to the salesmen, 
and perhaps—although none of them stress this last point—per- 
haps it will prove to be good advertising. 


Why Advertising Allowances Are Unsound: The prepon- 
derance of opinion and experience, however, is overwhelmingly 
against such uses of the advertising appropriation, even where 
competitive conditions exist. It was invariably admitted that 
such allowances attract a certain kind of business, and may even 
serve to bolster up the sales. But it was most emphatically 
stated, by those who had tried these methods and whose opinions 
are of weight, that the class of business thus put on the books is 
not the kind that will stay put over a period of time; and that 
generally speaking the use of price concessions weakens the 


3 


Survey and Study of Competitive Trade Practices 
in 289 Different Lines of Business 


SECTION TWO ADVERTISING AND FREIGHT ALLOWANCES 


salesmen and turns their minds away from the merits of the 
product and the service of the house, toward price. It is not 
without significance that nearly every successful organization 
pins its faith in those methods of sales management which can 
be depended upon to build a permanent business on a permanent 
foundation, and there is a decided cooling off toward forced draft 
methods which put a lot of business on the books, at a terrific 
cost, and which cannot be held except through continued price 
inducements. 

Over-Extended Trade Areas and Super-Sales Effort: It is 
our finding that a widespread reaction has set in against what 
for want of a better name we will call “super-salesmanship.”’ 
The competition of the last few years has sent the cost of selling 
higher and higher, and it is the view of thinking men that the 
chief reason for this is the fetish which we are making of “beat- 
ing last year’s figures.” 

‘It is our mania to beat last year’s figures that lies at the 
bottom of these advertising allowances. It is our mania to beat 
last year’s figures that we pay freight rates in one territory, 
while we won’t in another. It is our mania for more and more 
business that carries our salesmen into territories where they 
have no business to be. It is the same mania that makes us put 
on three salesmen where we only ought to have one. It is the 
urge for more business, regardless of cost, that causes us to make 
a dozen items when two would probably be sufficient. And it is 
this same urge that prompts us to unduly push salesmen for 
business, even to the point of telling them to “Get the business 
ethically if you can, but get the business.” 


Harry R. Wellman, former sales manager for the Hersey 
chocolate interests, and now professor of marketing, Amos Tuck 
School, Dartmouth College, summed this situation up when he 
told the National Association of Sales Managers, “In my opinion 
at least, most of the sales problems of today could be solved if 
the bankers could be brought to see the cost of getting the last 
$100,000 worth of business.” He pointed out that it had become 
the habit of bankers and those managing a business to set an 
arbitrary quota for the sales department, which usually was a 
good deal higher than actually expected, and then gear the fac- 
tory up to that basis. It was then put up to the sales department 
to make good or get out, and the goal thus established had to 


4 


Survey and Study of Competitive Trade Practices 
in 239 Different Lines of Business 


SECTION TWO ADVERTISING AND FREIGHT ALLOWANCES 


D be attained no matter what the price of getting the needed busi- 
ness might be! Too often the cost of getting the last few 
thousand dollars on the quota more than wiped out the profit on 
several months’ business. 


THR DAILY NEWS, TURSDAY, OCTOBER 23, 1923. 


GRATITUDE 


TENTH ANNIVERSARY | 


of the 


HARMONY CAFETERIAS 


= Ror forty peara mpectaliets tao oo 8 
sopgittsg quality food prod: A 
acta. -to -Chiregp's: fheethost 
Borel, Bereutaats not Cabs f 


JOHN SEXTON 
® COMPANY 


Scarier} SRS oracato | 


Tetephises Mets O68 : 
CH. WEAVER & CO. 


‘Wholerle Merchants 
aes SBUTUR, Eoos AND POULTRY 


S597 WF We it : omnaco | 


One Reason For Our Succéas— 4 


e We Hove Aluiays Served 


"[IVINGSTON'S Selehested: RYEBREAD | 


w. 5. oe COFFEE CO, 


‘ Bapecters end 
2: Hin GRADE TEAS AND Corrs = 
g EW YORK 


oo ee 43 Eases Kinits Goat 
| environment, the very lowest prices, AND A DESIRE AT 
ALL TIMES TO PLEASE AND SATISFY ITS PATRONS. 


: ‘The firms whose names appear on the right and left of 
_ this page represent those who have helped us to establish 


“Wholesale Meats and Poultry 
a as We: ‘Gantt: Wirer: Street 


icc cae aun 


cod gure trate: 


E COMPLETION of our tenth 


ear of steady growth is a fitting _ 


occasion for expressing our gratitude 
and appreciation to the people of 
Chicage for having made possible the tenth 


| anniversary of the Harmony Cafeterias. 
“Daring that time over THIRTY MILLION people have 


been served in the five Harmény Cafeterias —a total equal: 
ing the combined populations of New York, Chicago, Phil- 


. adelphia, Boston, Baltimore, St. Louis, Putsburgh, Cleve- 
“fand, Detroit, Los Angeles and the next largest 15 cities of 


the United States, with the entire population of Canada. 


: Supreme merit only could win such popular and universal 


expression of confidence and good will. The foundation 
of Harmony success was laid upon the maintenance at all 


times of the highest quality of foods, deliciously appetis 


ing cookery, equipment of modern efficiency, attractive 


and uphold these standards of service, quality and economy, 
We assure the people of Chicago that, as in the past, so in 


i. _ the future they can depend on our utmost efforts to merit — 
- their patronage by maintaining the highest ideals of elfic 


cient, sontieous es economical service. S 


THE 


= | HARMONY 


- CAFETERIA | 


25 West Randolph St. : 
328 So. Wabash Ave. 15 So, Wabash Ave. 
58 W. Weshington St. 


BE  Aemaltylooresse: cru rson hi ae ) 
q PO MVE WORMS! ie 
eee pe iene See ern 


SUBVEYORS 


poms Beare China Glass and Silvester 
i mal Harsion: 


x teria 
i Fees Roorspae Sevecoorn tego SOS, 
ae Sac aid 
Nang of aber, 


SAMUEL OLSON: & COMPANY. 


ALeERT PICK-Comenre 


BOB; 224 RaVdOPAT 


The Warkd's Lead Outdisers of Cafcteriag, Resemente, 


Hotel, Chibs, Houpitale bad starter caxbHetanenss 


WE VSROAND: RECOMMEND 


- DURAND} MeNE “HORNER co. 


| Pilisbury’s Pesos 
jae Ss doodle Tee suratiey: te 
Best Flour seeds by bere alt 
One of tha family “ 


piers atlbak 


HETZEL & CO 
Hans, Baron and Sausage 


VIENNA MODEL BAKERY 


AON: SOMMER, Manager. 


P2IALIO Wy Congress St. < Masme Ot4t 


LANZARATTO BROS. 
Whalesals : 
FRUITS AND VEGETABLES 
Hotel: Chibs and Institsions Sphbnl 


FRANK BALSAMO 
Gonerat Comnmdsstcen Mecchant 
FRUITS AND VEGETABLES 


2180, Dearborn Su 
Continuous Service 7:00 a. m. te es oe p. m- 


Testes’ Anniversary Special 
FRICASSEE 
OF CHICKEN 


WITH DUMPLINGS 


a5e 


Advertising of this variety should be charged to “‘Charity and Donations’’ 
fund and not against the advertising appropriation. 


5 


Survey and Study of Competitive Trade Practices 
in 239 Different Lines of Business 


SECTION TWO ADVERTISING AND FREIGHT ALLOWANCES 


The Value of Advertising Appropriations Questioned: Much 
of this excess cost can be traced to the prevailing practice of 
setting aside an arbitrary advertising appropriation, based on 
the sales quota, or on last year’s sales as the case might be. The 
prevailing tendency to camouflage price-cutting as an advertis- 
ing allowance, is traceable to this same practice. A liberal ad- 
vertising appropriation offers an easy place to bury direct selling 
losses. The advertising will be charged off as an expense any- 
way, why not let it carry the allowances to dealers and users that 


have been made to get their business away from competitors? 
Why not indeed? 


The money appropriated for the advertising of a business 
can only yield a full return when it is spent in accordance with 
some carefully thought out plan. In our opinion the present 
practice of basing this appropriation on the volume of business 
you did last year is fundamentally unsound, and unnecessarily 
wasteful of the company’s surplus. We contend, and our con- 
tention is supported by a great many sales managers, that the 
advertising should be figured as a part of the sales cost; that 
only as much money should be appropriated for advertising as 
will be needed to carry out some definite, prearranged advertis- 
ing plan; that such a plan should be linked up with the whole 
sales policy and sales program; and that there should be a 
Separate and distinct item in the budget called the “donation 
fund” out of which all requests for program advertising, dealers’ 
wall signs and similar advertising allowances be charged. We 
feel that it is quite unfair, and wholly wrong, to set up a certain 
percentage of last year’s sales for this year’s advertising, and 
then to carelessly disburse that money in all manner of rebating 
schemes, dealer donations, charity donations, and price main- 
tenance devices, none of which are tied up to any central plan 
and all of which contribute little or nothing to the real aim of 
the advertising. 


II—Freight Allowances 


While much that can be said against granting advertising 
allowances can likewise be said against freight allowances, still 
we find that there are times when a concern is justified in offer- 
ing a freight allowance. Indeed, the freight allowance, in the 


6 


” 


Survey and Study of Competitive Trade Practices 
in 239 Different Lines of Business 


SECTION TWO ADVERTISING AND FREIGHT ALLOWANCES 


present era of high freight rates and generally lessening profit 
spreads, is becoming more and more of a keen-edged tool in the 
sales manager’s hands. 


When If Ever Is a Freight Allowance Justified? We find, 
for example, in Evansville, Indiana, that a certain hardware 
jobber has been practically able to get control of the business 
there by quoting prices delivered at the dealer’s door, instead of 
the customary “f. 0. b. jobbing point.” He built up such a vol- 
ume that it is possible to make up a periodical car for Evans- 
ville and the delivery is then handled by a teaming contract. 
Such strategy can hardly be criticized. 

The practice of carrying stocks in warehouses at different 
points instead of making 1. c. 1. shipments from factory is also 
growing, and if such a practice permits the seller to offer certain 
freight allowances, it would be poor business indeed not to do 
it. A New York candy manufacturer who ships from his fac- 
tory direct to his Chicago customers in less than carload lots 
pays approximately $1.245 a hundred. If he shipped in car loads 
the rate would be $0.945, a saving of approximately thirty cents 
a hundred—a sizeable amount in a line where a-margin of a 
fraction of a cent will often swing the sale. On dry batteries 
the rate between New York and Chicago is $1.06 less than car- 
load and $0.565 on full cars. The spread here is more than forty- 
nine cents on the hundred. 

Then there is the saving in freight effected by “pooled ship- 
ments.” A prominent eastern battery concern sends a salesman 
periodically to Chicago to work the middle west. In two or three 
weeks he accumulates a possible two hundred orders. He then 
makes the entire shipment in one car, delivering the car to a re- 
sponsible public warehouse in Chicago. The warehouse notifies 
the respective purchasers that their shipments are in and they 
send their trucks to pick them up. If the customers are out-of- 
town, the warehouse company relays the shipment from Chicago 
at less than car load. By giving the customers the advantage of 
this freight saving, it is possible for this company to undersell 
competitors, without in any way cutting profits, and without 
cutting prices. This same concern has interested several other 
local manufacturers in warehousing stocks in Chicago, all using 
the same warehouse, and they are often able to pool their Chi- 
cago shipments, getting the advantage of the car load rate. 


7 


Survey and Study of Competitive Trade Practices 
in 239 Different Lines of Business 


SECTION TWO ADVERTISING AND FREIGHT ALLOWANCES 


Decentralization of Stocks to Reduce Freight: Your investi- 
gators find on every hand a growing realization that freight is 
not as inflexible an item of cost as generally supposed. In many 
cases we found eastern concerns competing in San Francisco 
with Californian manufacturers on a prepaid freight basis. This 
they are able to do by warehousing their stocks on the coast. In 
one instance we found an ink manufacturer who was confronted 
with the problem of having to meet local competition in Chi- 
cago, where his competitors carried stocks of ink, ready for im- 
mediate delivery. His ink was shipped from Louisville, and 
many sales were lost to competition because of the fact that 
printers would not hold their presses idle while the ink was 
shipped from out of town. A thorough investigation of the 
Chicago market convinced him that the operation of a branch 
house, or a warehouse of his own, would prove too costly to per- 
mit a profit of sales. The overhead would eat up the profit. 


Unwilling to give up the Chicago market the sales manager 
sought information about one of the leading warehousing insti- 
tutions. Here he learned that his 500 pound drums of ink would 
be stored and handled for 55c per drum per month for the first 
month—25c for storage and 35c for handling. 


Ink moves from Louisville under the Consolidated Classifica- 
tion Rule 25 in less than car lots. The rate from Louisville to 
Chicago in this classification is 60.5c per hundred pounds; in 
car lots 30c, leaving a saving of 30.5c per hundred pounds or 
$1.525 on each 500-pound drum. This saving in freight alone 
would practically pay all warehousing charges for four months, 
and at the same time permit immediate delivery. 


The sales manager of the ink concern was surprised to learn: 


about the very complete service offered by the warehouses. Cars 
consigned to his concern, in care of the warehouse come in with- 
out any switching charge, no matter what carrier brings them 
into the city. When the cars are shipped the warehouse is noti- 
fied immediately of the car numbers. Through their connections 
with, and knowledge of the railroad they are able to expedite 
delivery. When the contents of the cars are unloaded and 
stored the manufacturer gets a receipt for the merchandise, 
itemized according to variety, style, or catalog number. These 
receipts show the specific lot number used by,the local represen- 


8 


» 


Survey and Study of Competitive Trade Practices 
in 289 Different Lines of Business 


SECTION TWO ADVERTISING AND FREIGHT ALLOWANCES 


tative in making withdrawals. In the event of damage, overs or 
shorts, the warehouse report expedites payment of claims. 


There are, of course, a great number of warehouses scattered 
throughout the country. All of them, however, are not depend- 
able. All of them do not solicit the warehousing of distributed 
products. The following warehouses, however, have been inves- 
tigated, and while by no means a complete list, they cover the 
country fairly well: 


BGssANGELES CALIF. Cost sett 24 Union Terminal Warehouse Co. 
OAELAND | CALIF) jyigcetey aie oe. |G Lawrence Warehouse Co. 

SAN PRANCISCO, (CALIB vil. 9.) ade re Lawrence Warehouse Co. 

SAN FRANCISCO, CALIF............ San Francisco Warehouse Co. 

TTA NVA gl oA ee aes esa ee Morrow Transfer & Storage Co. 
CEIGAGO.LLINOIS tae ce at nee aa: Currier-Lee Warehouse Co. 
CHICAGO, ILLINOIS 9) eae ss cae: Western Warehousing Co. 
EOSUISVILER TINY 4 tere eer ee ey a Louisville Public Warehouse Co. 
INEWIORLEANS, CAS) cements: - are Douglas Public Service Corp. 

ST. PAUL-MINNEAPOLIS .......... Central Warehouse Co. 

Se LOUIS: hive aie are ames n'a S. N. Long Warehouse Co. 

OMAHA UNEBRASKAGC ys oods0 5 Ee Bekins Omaha Van & Storage Co. 
COMALIAY NEBR ASK Ags yuk oats u out) W. M. Bushman 

OMAHA, NEBRASKA ...........--- Ford Transfer & Storage Co. 
OMAHA NEBRASKA lo. 7) esi c ms Gordon Fireproof Warehouse & Van 
OMAHA NEBR ASK AI oie. cds «3 Mercantile Storage & Warehouse Co. 
OMAHA NEBRASKA: 57.7 ccna. 4 Nebraska Storage Warehouses 
CIMATTASNEDRASKA ope fy eae costs Pacific Storage & Warehouse Co. 
OMAHAs NEBRASKA) A erect cs «0% Terminal Warehouse Co. 

NEWRY ORES INJAYS 100, Rohe ae Rr. fd Bush Terminal Company 

AKRON ORIO be Oi Sai ol uae i TR AF. W. Lee Cotter Warehouse Co. 
CUEVELAND)S OHIO“ ifs. tin Gyee «ee Ninth St. Terminal Warehouse Co. 
COLUMBUS) OHl0ie4 5. takes make W. Lee Cotter Warehouse Co. 
DIANSEIVI,: OHO. oe o> cancun « W. Lee Cotter Warehouse Co. 
FCOLEDO: . OHIO$ 4 icin cy > Be teeters W. Lee Cotter Warehouse Co. 

SOLE DOME I. on ste an it kee tak aes Toledo Terminal Warehouse Co. 
PORTLCAND.« OREGON) oe arcana ess Oregon Transfer Co. 

PUUEADRLPHIA, CASS teats cote Terminal Warehouse & Transfer Co. 
Ei PASO! el EXAS) Oe ey fee ron ess International Warehouse Co. 

FORT, WORTH, TEXAS. 020991 . Rem Binyon-O’Keefe Fireproof Storage 


When the Goods Are Sold “Delivered”: Nearly all of the 
concerns questioned report that they will meet competitor’s 
terms in territories where competitors sell on a delivered basis— 


2 


Survey and Study of Competitive Trade Practices 
in 239 Different Lines of Business 


SECTION TWO ADVERTISING AND FREIGHT ALLOWANCES 


in many instances the competition being local. The prevailing 
practice in this connection is to ship “freight collect’? and permit 
the customer to charge the freight back, or deduct the charge 
from his remittance. The theory is that by handling the charge 
this way, no capital is tied up. 

It is evident after talking with a variety of sellers that most 
of the allowances which they make are either in territories where 
buyers have been educated to demand “delivered” prices, or in 
far away territories where home competition must be encoun- 
tered. This is particularly true of the Pacific Coast, which in 
the last few years has developed a wide range of manufacturing 
organizations, and these are making a serious bid for business. 
In a great many cases they are able to get business in spite of 
the older eastern manufacturers being better entrenched, simply 
because of the freight rate advantage they enjoy. That eastern 
manufacturers must be prepared to sacrifice an ever increasing 
share of their business on the Pacific Coast to local competition 
is evident to anyone who has followed the phenomenal develop- 
ment of that territory. 

It is a nice question of procedure as to what the policy of the 
future should be in regard to going after business in these less 
favorable markets. Dartnell feels very strongly that too many 
concerns are having their profits nicked because they are spread- 
ing sales effort out too thin. We find that not one-half of the 
concerns which are attempting to do a national business, are 
financially able to do a maximum national business. Even if 
they did all the business that their finances would permit, they 
could not handle the business which they could reasonably ex- 
pect to get out of a territory which would embrace only one-fifth 
of the total area of the United States. Yet these same concerns 
spread their salesmen all over the face of the map, in territories 
where it costs them twice what it should to get business, when 
they have not even begun to reach the point of diminishing 
returns in their own backyard market! 

We sincerely urge upon our subscribers that they give serious 
thought to this phase of their sales work. Is not your present 
policy of going all over the country after business a misguided 
policy? Couldn’t you make more money by concentrating your 
sales effort in territories closer to home, where you have the 
advantage of freight rates, and where you can develop business 


10 


ra 


hilo ate beter 


ark at ree shcciikia ae Saat ete Ere Sore 


RT ORE iy On : 
pei Poke, Fae £%: ons ‘ie co 
et es Ea es : * BM a 


* : ; : 
i a - a tin kta med seepirene sume: Se : 


a 


é Lah? sand aps render temnes 
ete 2 at ap Ee ere 


arene fees i iin canteen magiaeeadn 


a 


eubh 


Fab Fe. 


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—. 


oY 


‘ 


“Bae, 


(FILE: SECTION IH, COMPETITIVE TRADE PRACTICES) 


ANALYSIS OF PRACTICES 


IN 
MAJOR LINES OF BUSINESS 


Advertising and Freight Allowances 


Based on Replies to 1000 Questionnaires to 
Subscribers of “Sales Management’? Magazine 


INDUSTRY 


Automotive equipment 
Building material 
Caskets 


Confectionery 
Drucsiand ‘onemicalsi winds miele elec 
Dry goods (wholesale) jay ici. aie ae 
Electrical products 
Engineering specialties 
Food products 
Grain and milling 
Grocers (wholesale) 
Hardware andi cutlery iil aie wikiatnyals 
Household supplies 

Jewelry and watches 
Machine tools 
Metals 
Milling machinery and supplies.... 
Office appliances 
Oils and greases 
Packers 
Printing ‘and engraving in on 
Radio supplies 
SEEAS VAIO MMUMSERICS 04/2 -/ een awa ain | 
SSS Att TUTE S EN Nae tiie SNe) a 


@, 8) ee apse ON lee ae eye ie te |e leh ten we 


eerevree ev es eee eee ee 


6 ellie ie lel wtlenite Melee lela) 8 ie) ele le! ie 


wm ee) wl Aid! tes Os) @ el) 6) ef my \e | atid 


@ wieilye liebe eye ‘sc @ Kee, 


ie ‘lah yeliie jie oe! (@ \ eve) eo) 16) <6 16) oe 


©, lel Nel elias \Wy e pant» kee re, (3/6 


Dhow eke GG. Ct ey ene mel yee | fe) le he 


ee One a Ohm) eis Ae) LO Nee Oy e116 Terror elle \e/?) Bo Oar emis) ie 


el Sues foie) eve) e's, 6) ep) le iaiie 


6 te ee! fae ie) @ Vali neni (ie itiellhe) hehe tte 


wee ey ee. ee) OO) e) OO) ON) OOO, eee ie Oe te 


She ieiie. (6 se) 6: 'e) \e) Lee @ me) wel ae at el belle 


Care sah a GlorareLCea iinet uM enti 


Soaps and cleamers ou op aka, | 
Stationery and office supplies...... | 
VALS SAT) TUDO ET ie. Wis seine store naete 
Wearing apparel 
Miscellaneous 


Oe tale neh eee “Be Oe 40 1S ee) me) 2 8 Ga wee 


© 1924, J. C. Aspley 


>  \Do You Pay Freight or 
r= Express Charges? 
2 
Z. 

Yes Partly No 
40 10 30 


35 


| | 
20 

6 

3 oO 

SN 15 
8 14 12 
Lait ee 7 7 
42 LW 30 
60 15 40 
70 31 14 25 
2 le 9 
40 > 11 24 
RPA Bi) 14 ao 
Yee hi hii 8 4 
ou dire o i 
LOT ie 10 
AA tse 4 10 
f ash 3 
4] 10 6 25 
V2 + 8 
Shit al i 3 
POE Oa 6 14 

+ 2 2 

11 4 "f 

Lon ie 19 

10 D SW hie 

rate Re + 4 

40 6 34 

25 5 10 

5 

| 


Do You Make Ad- 
vertising Allowance 


to Customers ? 


9 
5 


3 


6 


3 


mm &, bo: 


ins 


Yes Partly No 


| 
35 
49 


Do You Do 
“Resale” 
Work for 
Customers? 
Yes No 
pie. 10 
34 26 

6 

6 

3 12 
20 | hfe 
ua 4 
SOM oie 
4] 19 
29 4] 
5 6 
10 35 
4 oO 
] 11 
6 

10 

+ 12 
On crite 
£0 29 
4 8 
3 

15 

2 2 
4 /. 
Ui 19 
4 6 
oH 8 
OL 9 
4 21 
12 24 


bo 


Do You Pay 
for Demon- 
strations in 


Dealers’ 
Stores? 
Yes No 
10 30 
it 59 
3 3 
hs, 
Sy 
a 7 
6 24 
10 45 
ak 47 
o 6 
1 39 
37 
12 
6 
5 
16 
6 
5 31 
hy 12 
3 
4 
8 
Me Lo 
10 eid 
8 
40 
ie 25 
12 16 


GAG 


Survey and Study of Competitive Trade Practices 
in 289 Different Lines of Business 


SECTION TWO ADVERTISING AND FREIGHT ALLOWANCES 


at a lower cost per order? Are you too making the common 
mistake of spreading your sales effort out too thin, just so that 
your sales effort covers the country? 


IlI—Selling Your Customer’s Customer 


A sales forcing device which is still popular in many im- 
portant lines of business, and which we must consider as a 
competitive trade practice, is a special inducement to do “detail” 
work for customers. This embraces a number of activities, such 
as a manufacturer calling on the consumer for the dealer, calling 
on the farmer for the local agent or distributor, calling on the 
dealer for the jobber, etc. The theory of this practice is that 
the average distributor will not create demand, but only serves 
such demand after it has been created. 


Resale work acquired a decided impetus during the slump of 
1921 when it was almost impossible to sell a distributor a bill of 
goods without first going out and getting enough orders from his 
customers to convince him that he could turn the money quickly. 
In selling advertised package goods this method, sometimes 
called the “doubling up” plan, has long been used to get quick 
distribution. A concern putting a new cake flour on the market 
sends out salesmen to work each town. These salesmen are paid 
a commission on every package they sell to the housewife by 
the manufacturer at the end of the week. The orders are turned 
over by them to the crew manager, usually the territorial sales- 
man, who takes them to the dealer and exchanges them for a 
two to one order on the dealer’s jobber. In other words, if the 
salesman’s canvassers take orders for fifty packages of flour to 
be delivered by a certain grocer, the salesman gets that grocer to 
give him in return an order on his jobber for one hundred pack- 
ages. He then takes similar orders, on various jobbers, from 
other grocers, which orders he sorts out by jobbers, and then 
goes to each jobber in turn and gets from him an order on the 
factory on a two to one basis. Thus he doubles his canvassers’ 
orders twice, and when the product is a quick repeater, even 
larger multiples have been successfully used. 


In the building and equipment field we found a great deal of 
detail work being done on contractors, architects, and owners. 
We find too, that there is under way a revival of the practice 


11 


Survey and Study of Competitive Trade Practices 
in 239 Different Lines of Business 


SECTION TWO ADVERTISING AND FREIGHT ALLOWANCES 


once quite common, of using specialty men to travel with job- 
bers’ salesmen and work the dealer on their particular product, 
turning all orders over to the jobber’s salesman. This practice, 
however, is frowned upon by the jobbers and resisted by the 
jobbers’ salesmen. It slows them up and makes it more difficult 
for them to sell. 

The concerns doing resale work frankly admit that it is 
highly expensive. Very few of them are convinced that it pays. 
And nearly all of them feel that they are doing something which 
they are already paying their distributors to do. Yet all of 
them confess that unless they do something of this kind they 
cannot get the necessary volume, for the distributor in nearly 
every case cannot or will not get behind a product that requires 
special sales work—and most of them do. 

Use of Junior Salesmen for Detail Work: In an endeavor to 
overcome the objection that doing resale work divides the time 
of a salesman who is employed to get business in large blocks, 
and whose time should be devoted to that end, several concerns 
have experimented with junior salesmen. 

These junior salesmen work under the senior salesman in the 
territory. They call only on the customer’s customer. They 
help the dealer arrange his stock, if he carries a stock, and go 
out with him to call on his prospects. In short, they are the 
customer’s salesmen but loaned by the manufacturer. When 
they have shown sufficient progress, and as fast as openings in 
the senior sales organization occur, these juniors are advanced 
to assistant salesmen, and eventually salesmen in charge of a 
territory. This plan wherever tried has been found most suc- 
cessful and is recommended. It permits of the higher priced 
territorial salesman devoting all his time to calling upon poten- 
tially large unit buyers. It provides a means of recruiting a 
higher type of salesman. And it pays for its own operation out 
of the increased business and enhanced good-will that follows. 

Employment of Canvassing and Sampling Crews: A reac- 
tion seems to have set in against the use of house-to-house 
sampling and selling in the interests of nationally distributed 
products. Most of the concerns who reported as having formerly 
employed that method, but as having now discontinued it, claim 
that the cost is unproportionately high. The loss through substi- 
tution, both by the dealer and by the jobber, is very large. The 


12 


& 


Survey and Study of Competitive Trade Practices 
in 289 Different Lines of Business 


SECTION TWO ADVERTISING AND FREIGHT ALLOWANCES 


grief that accompanies the financing of this sort of a proposition, 
such as canvassers misappropriating funds and padding orders, 
is disheartening. 


If anything is to be learned from the experience of more than 
forty concerns quizzed on this point, it is that any plan for creat- 
ing a forced or unnatural demand should not be used unless 
absolutely necessary. Nine out of ten plans which fall in this 
category leave trade dissatisfaction in their wake which does 
more harm than good. Most of them overstock the dealer. 
Nearly all of them run the selling cost up out of proportion to 
profit, and all too often the expected repeat demand which is de- 
pended upon to even up the score fails to materialize—due, of 
course, to the temptation of the dealer to substitute. 


IV—Free Advertising Materials 


There is a wide difference of opinion among advertisers as to 
the best way of distributing store signs, window trims, counter 
displays, hangers, folders, shelf signs, electrotypes, booklets and 
the hundred and one other kinds of advertising material, gen- 
erally classed as “dealer helps.” 


We find some manufacturers who regard this form of adver- 
tising as the most effective means to meet competition in the 
dealer’s store, and they are willing and even anxious to give a 
dealer liberal supplies of material. Seldom, if ever, do they 
make any effort to find out if it has been used. We are informed 
that more than half the total advertising appropriation in some 
instances goes for this kind of display material. The manufac- 
turers in such cases feel that they are at once buying the dealer’s 
good-will, and at the same time tying his store up with national 
or semi-national advertising to the consumer. 


Waste of Display Material Enormous: Inquiry among 
dealers, and talks with advertisers who have given this matter 
of waste of dealer material careful study, convince us that it is 
unnecessary and unwise to make it too easy for the dealer to 
requisition out advertising material. It is our finding that the 
dealer in most instances values material of this kind according 
to the value that the advertiser himself places upon it. If you 
peddle it indiscriminately, what is more natural than that your 
dealers will treat it the same way? 


13 


Survey and Study of Competitive Trade Practices 
in 239 Different Lines of Business 


SECTION TWO ADVERTISING AND FREIGHT ALLOWANCES 


There is a growing tendency among manufacturers who sell 
the better trades, to adhere to the policy of making the dealer 
pay at least a portion of the cost of such advertising material 
as he orders. In some lines the prevailing practice is to make 
the dealer pay one-half the cost. In others the manufacturer is 
able to make the dealer pay the whole cost. There does not 
seem to be any fixed proportion that can be set down as a 
general practice. The theory seems to be that the more the 
dealer can be made to pay, the more of his money he will have 
invested in the advertising, and the more interested he will be in 
getting maximum returns from his investment. 


In talking with dealers and users of dealer helps we find that 
much of the waste of these materials can: be avoided if more 
thought were given to quality of material, rather than quantity. 
Dealers invariably complain of too much cheap dealer material. 
They ask for less material, but better material. The average 
dealer gets more advertising material than he has the time or 
inclination to put up anyway. A common complaint about elec- 
trotypes for newspaper ads is that there is too much in them 
about the product and not enough dealer flavor, especially in the 
illustrations. Manufacturers report that they find the practice 
of furnishing dealers with cuts of the product has bad features. 
Often a dealer will use a cut of some standard advertised prod- 
uct to illustrate an advertisement of a special sale on some com- 
peting or orphan brands. For that reason some manufacturers 
are only furnishing electrotypes of complete newspaper adver- 
tisements so that the dealer cannot misuse them. 


It is generally held that the returns from a given amount of 
money invested in lithographed dealer display material, will 
yield a greater profit than the same amount of money appro- 
priated for electrotypes, or movie slides. It is also easier to get 
the dealer to pay for well planned store material, than electro- 
types. 


V—Store Demonstrations 


In the marketing of food products, household specialties such 
as vacuum cleaners and steam cookers, we find a great deal of 
importance attached to demonstrations in the dealer’s store. We 
find some cases of where manufacturers have broken through 


14 


~~ 


€ 


—- 


» 


Survey and Study of Competitive Trade Practices 
in 239 Different Lines of Business 


SECTION TWO ADVERTISING AND FREIGHT ALLOWANCES 


entrenched competition by following this practice. In some 
instances they are willing to pay the dealer, especially depart- 
ment stores, liberally for the use of space. They also stand all 
expenses of demonstrators, materials, and local advertising. But 
in most lines investigated the manufacturer makes the dealer 
share the expense, usually on a fifty-fifty basis. Out of 635 con- 
cerns replying to a questionnaire on this point, all but eighty- 
seven said they did not pay for demonstrations, holding that the 
sales from such demonstrations profited the dealer as much as 
the manufacturer. 

Traveling Demonstrations: A practice which is growing in 
popularity is the use of traveling demonstrations or exhibits, 
routed through a salesman’s territory, and loaned to one dealer 
after another. A notable exhibit of this kind is used by the 
Meriden Cutlery Company of Meriden, Conn. “Our cabinet,” 
writes this advertiser, “contains a small stock of all the numbers 
of our manufacturer. It is attractive enough to be displayed in 
a prominent part of the store. It has celluloid buttons against 
each item with the prices on them. Each piece of cutlery is 
lacquered and prepared so as to retain its attractive appearance, 
and as it is under glass it cannot be handled. 


“Our dealers are most enthusiastic about the cabinet, and we 
have in nearly every territory a waiting list of dealers anxious 
to have it on display. It is very effective in selling cutlery, as 
the customer who comes into the average store has to wait for 
the clerk. When a cabinet is on the floor he can go to it and 
decide what he wants, and invariably finds other items that he 
did not have in mind when he entered the store.” 


Summing up the result of our investigation of practices in- 
volving the expenditure of money to cooperate with the dealer 
at the point of contact with the consumer, the preponderance 
of experience is that there is too much money being spent on 
cheap dealer helps. Manufacturers who are having the best 
results from the distribution of dealer materials, and the use of 
store demonstrations, are turning more and more toward fewer 
but higher priced displays. It is our opinion that this tendency 
will be more and more in evidence next year, and we urge our 
subscribers to put out less dealer material, but better material. 


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SUPPLEMENTARY NOTES 


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SUPPLEMENTARY NOTES 


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SECTION THREE 


Cancellations and Returned 
Goods 


A Discussion of the Causes That Result in Cancelled and 
Returned Orders and Plans Being Used 
to Solve This Problem 


A ee Pe at eg ieee 


SAT MOTE ISS 


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SECTION THREE 


Cancellations and Returned 
Goods 


What Steps Should Be Taken to Guard -Against Cancellations; 
Speculative Selling for Deferred Delivery; The Use and 
Abuse of the Guarantee; Poor Salesmanship As 
a Cause of High Returned Goods Losses 


Copyright, 1924, by J. C. Aspley 


a marked increase in the losses from cancellations and 

returned goods. Whether it does or not, it is all too evident 
that such losses are already perilously high and growing rapidly. 
Nearly every manufacturer we queried, complained bitterly 
about his increasing returns. Jobbers were found to be even 
more violent in their denuncigtion. 


i is generally felt that the present year will bring with it 


Our investigation into the causes, and possible remedies, for 
this unhappy situation lead to some interesting discoveries. We 
found, for example, that the growth of the evil was in no small 
measure due to haziness among both manufacturers and jobbers 
as to the changing status of the dealer. Most of the manufac- 
turers we talked with told us they regarded the dealer as their 
distributor. The jobbers had the same idea. But let it be noted 
that the dealer does not regard himself as a distributor at all, 
but as the purchasing agent for his community. In this he is 
backed up by the government itself, and we feel it is important 
to make this distinction clear. 


Any policy that is based on the supposition that the dealer is 
a distributor as, for example, consignment selling and specula- 
tive selling for deferred delivery, is out of tune with the present 
trend. We feel very strongly that the maker and his jobbers 
must be prepared to carry larger stocks, and that those concerns 
who are going to get the bulk of the business in the future, will 
be the ones who are prepared to adjust themselves to these con- 
ditions. Education by national advertisers, by merchants’ or- 
ganizations, and by trade papers and colleges, has finally borne 


- 1 


Survey and Study of Competitive Trade Practices 
in 239 Different Lines of Business 


SECTION THREE CANCELLATIONS AND RETURNED GOODS 


fruit. Whether for better or for worse, the idea of bigger profits 
from quicker turnovers has taken hold with a vengeance. It is 
revolutionizing the whole merchandising scheme. 


Effect of Quick Turnover Policies on Slow Movers: So 
impregnated has the customer become with the need of turning 
his capital quickly that he is growing more and more adverse 
to buying anything beyond his immediate requirements. He is 
prone to unload back on the manufacturer whatever the manu- 
facturer unloads on him. Competitive conditions make it easy 
for him to do this. And he is utilizing his advantage to the full. 


This condition is fostered by concerns like the Western Elec- 
tric Company which sends its salesmen out instructed to capital- 
ize and emphasize the liberal guarantee and exchange policies of 
the company. These salesmen tell the dealers, under instruc- 
tions, that anything they can’t sell they can return. They tell 
the dealer that the product will sell, and if it doesn’t sell he can 
exchange it for something that will sell. The Western Electric 
Company has built up a highly successful business. It believes 
much of its success has resulted from using this exchange policy 
to meet price competition. Perhaps so. But it is the opinion of 
your editors that with all due respects to the Western Electric 
Company, any policy that fails to impress upon the dealer the 
salability and quality value of the product, but places the selling 
emphasis on exchange privileges, is not conducive to greatest 
success, and that such a policy bya leader exerts a demoralizing 
effect on the whole industry. 


Wide Variation of Practice Found: Only ina very few lines, 
where policies were influenced a great deal by associations of 
competitors, did we find anything approaching standard prac- 
tice. We found several paint manufacturers who rigidly adhered 
to a twenty per cent handling charge on returned goods. But 
there was one who made no handling charge whatever, and two 
who charged only ten per cent. There seemed to be no formula 
in common use for arriving at what a proper charge for handling 
returned goods should be. About -one-third of the concerns 
queried made no charge at all. Of the remainder, the charge 
ran all the wayfrom: five per cent, inthey case vo! simall aire 
manufacturers, up to twenty-five per cent in the case of whole- 
sale druggists. The most common charge is ten per cent, 
although many jobbers fix the rate at fifteen per cent, which 


2 


Survey and Study of Competitive Trade Practices 
in 289 Different Lines of Business 


SECTION THREE CANCELLATIONS AND RETURNED GOODS 


they feel returns their profit. Some make a flat charge, regard- 
less of the product returned, while others use varied rates accord- 
ing to the nature of the goods. Thus a hardware jobber has one 
rate for building hardware and another for seasonable products, 
such as garden hose and radio supplies—a line in which the 
percentage of returns runs well over twenty per cent, as against 
the usual four or five per cent in the jobbing line. 


The same is true in the matter of cancellations. We found 
in the installment book business, for example, that the older 
and more thoroughly established businesses would not accept 
cancellations, while newer and less experienced concerns made 
little real effort to enforce their contracts. In one instance, we 
found a concern in this field which carried an item amounting to 
nearly thirty per cent of its total budget to cover losses from 
unfilled contracts. 


We found concerns who were still doing business under the 
post-war policies of late 1920, when the bars were down and 
cancellation was epidemic. These concerns, having established 
an indifferent policy to cancellations, had never felt strong 
enough to “tighten up.” They felt it helped them to. have a repu- 
tation for leniency—that it gave their salesmen something to talk 
about. We found others who held to the British view that an 
order was an order, and firmly, though politely, refused to 
cancel it, even at the risk of sending the customer to a com- 
petitor. Out of all these widely conflicting practices we have 
arrived at the following conclusions: 


II—Causes for High Cancellations and Returned Goods 


We are firmly convinced that no business concern need have 
a high percentage of cancellations, or more than two per cent 
of its total billing returned, if it is willing to temporarily lose 
some business. We are strongly of the opinion that the returned 
goods problem is nine-tenths a mental condition. It exists be- 
cause, in the first place, the management thinks it is a neces- 
sary business evil, and secondly, because the salesmen are per- 
mitted to think that they are doing a customer a favor when 
they “fix it up” so that he can return certain merchandise. It 
exists because the salesmen are not instructed in selling an order 
so that it will stay sold, and will not cancel. It exists because 


3 


Survey and Study of Competitive Trade Practices 
in 2389 Different Lines of Business 


SECTION THREE CANCELLATIONS AND RETURNED GOODS 


the salesmen are never made to understand that a high percen- 
tage of returned goods, or cancellations, is glaring evidence of 
sloppy salesmanship and general inability. It exists because the 
customer has not been made to see that the privilege of return- 
ing goods, or cancelling an order, is a matter to be negotiated, 
and not a matter of his dictates. 


Lax Policy As a Factor in Returned Goods Losses: Here is 
an indication of what can be done to cut down returned goods by 
simply tackling the problem resolutely: Figures compiled by 
the Retail Trade Board of the Boston Chamber of Commerce, 
detailing percentage of goods returned by ten department stores 
of that city, showed Store No. 1 with a percentage of .047, 
whereas Store No. 7 showed 16.31 per cent returns. A similar 
analysis by the National Retail Dry Goods Association, based 
on the records of stores in thirteen large centers, not including 
New York, showed percentages ranging all the way from 5.01 
to 23. The percentage of returned cash sales to total sales, cash 
sales ran from 1 to 8, the percentage of returned charge sales to 
total charge sales was 2.94 to 25.80. The percentage of re- 
turned C. O. D. sales to total C. O. D. sales ran from 5.60 to 36. 
While we grant that the character of the store has much to do 
with the percentage of returns, the figures we present are of 
interest because they prove the point we have made, that an ex- 
cessive returned goods loss is not always an indication of cus- 
tomer’s buying habits, but rather failure on the part of the man- 


agement to realize the need of a systematic policy. This applies 


to a manufacturing or a jobbing business just as it does to the 
retail business. 


Indifferent Salesmanship As a Factor: A check of the work 
of individual salesmen, in a number of different concerns, both 
manufacturers and jobbers, show that a liberal return goods 
policy not only does not help sales but, on the contrary, miti- 
gates against a larger volume. Invariably the salesmen who 
produce the most business have a lower percentage of returned 
goods and cancellations, whereas the salesman who produces the 
smaller volume of business, invariably has the highest percentage 
of returned goods and cancellations. This finding leads us to the 
conclusion that a good salesman does not need a lax returned 
goods policy to lean upon, and that the only object such a 


4 


Survey and. Study of Competitive Trade Practices 
in 289 Different Lines of Business 


SECTION THREE CANCELLATIONS AND RETURNED GOODS 


policy serves is to bolster up the weak sisters, without increas- 
ing the productiveness of the stronger men. 


In cross-questioning a number of salesmen, whose records 
showed a high percentage of charge backs, it was found that 
they made little, if any, effort to “nail the order down”’ after it 
was sold. In carrying our inquiry to the customers of these 
salesmen it was found that these salesmen even went so far as 
to assure the dealer that if he placed a larger order than he in- 
tended, he could get the advantage of the quantity price, and in 
the event that he was unable to dispose of the goods he could 
simply return them. 

We found among salesmen who were selling oil pumps that 
in many cases they “slopped over’ the sale by attempting to get 
the contract signed without the buyer reading it, and then “for- 
getting’ to leave a duplicate copy of the order with the cus- 
tomer. We find salesmen are prone to do this when the order 
is at all complex, fearing that the various legal clauses in the 
contract will cause the customer to hesitate and ask questions, 
thereby getting off the main track. We recommend that order 
forms be as simple as possible, and free from legal verbiage. 


How One Salesman Cut Cancellations: In one sales organ- 
ization we found that the man who had the reputation for being 
the best producer, also had the distinction of having the fewest 
number of cancellations. Out of a sales force of 500 men this 
salesman stood second in total volume, and first in cancellations. 
He explained his method of keeping down cancellations as 
follows: 


“After I have my man signed up I put away all my samples 
and printed matter except my order book. Just before I get 
ready to leave I say to the buyer: ‘Now, I want to spend a 
moment with you and go over this order to make sure that 
everything is clear. Here is your carbon copy of the order, 
which I want you to keep for reference. Here is the original. 
Let us compare them. Here is the price—that’s plain, isn’t it? 
Here are the terms—they are as you understand them, aren't 
they? 

“ ‘Now, this is a business deal. You have bought something, 
and we are going to ship it and you are going to pay for it. lam 
a salesman and I will be gone, but I have a reputation to main- 


5 


Survey and Study of Competitive Trade Practices 
in 239 Different Lines of Business 


SECTION THREE CANCELLATIONS AND RETURNED GOODS 


tain, and I am somewhat cranky about maintaining it. I never 
have cancellations or complaints from my customers, and I never 
want to break that record. 


““Tf there is any possibility of a misunderstanding or a can- 
cellation in the case of this order, I want it settled now, because 
you see by this clause that this order cannot be cancelled after 
it has been signed. 

““Now, everything is clear. You have an exact copy of the 
order, which protects you, and I am taking this original order, 
which protects me. I will now be on my way. Thank you for 
the order and you may be sure I will drop in again the next 
time I am in town.’”’ 

As a result of this method of nailing down the order, this 
salesman earned twenty per cent more money in a year by the 
complete elimination of cancellations, allowances for cash dis- 
counts claimed, free items claimed and many other losses inci- 
dental to orders which are not thoroughly understood. 


Selling the Salesmen the Importance of Clean Orders: One 
Wisconsin manufacturer, who suffered from returned goods, 
made a careful analysis of a number of orders. He decided that 
the fault was laregly his, in that, both directly and indirectly, he 
had failed to acquaint his customers with his own beliefs and 
with the basic facts behind his beliefs. As a result of the 
analysis, he called his twelve salesmen into headquarters. He 
emphasized the issue by confining the conference to returned 
goods. Asa result, the men thought and talked nothing but re- 
turned goods during the two days at headquarters. They sold 
themselves upon the importance of selling the dealers the exact 
situation and the remedy. Even though this meant, in some 
cases, smaller orders, and in all cases a closer supervision of the 
dealers’ stock by the salesman, there was no hesitancy in ac- 
cepting both the shrinkage and the responsibility. 


The salesmen went out with the spirit of crusaders, thor- 
oughly convinced that their cause was right, and believing with- 
out reservation that they could convince each one of their cus- 
tomers with the fairness of their proposal. 


Importance of Properly Executed Orders: During the can- 
cellation landslide of 1920, many manufacturers suffered as a 
result of having on their books many orders which were non- 


6 


Survey and Study of Competitive Trade Practices 
in 289 Different Lines of Business 


SECTION THREE CANCELLATIONS AND RETURNED GOODS 


enforceable at law. The same condition is to be found in nearly 
every business today. Sellers feel that inasmuch as it is not 
their policy to jeopardize customer relations by enforcing a con- 
tract, that the form of the contract and its proper execution is 
not a matter of concern. There is, however, another side to 
this. There is a very decided moral effect on a buyer when he 
knows that the order he has given to you is a water-tight order, 
and not merely an indication of intentions. The very fact that 
you have taken the pains to comply with the state laws, and go 
through the legal motions is in itself an outward indication of 
your intention to treat it as a binding obligation. This implica- 
tion does not prevent a sale, but it may easily prevent a cancella- 
tion. We therefore suggest salesmen be instructed to educate 
their customers, while business is good—that it is your policy 
to regard an order as a contract. 


Legal Points to Be Considered in Writing Orders: A promi- 
nent attorney offers the following suggestions for keeping down 
cancellations: 


1. Agreements for the purchase and sale of merchandise are 
contracts for the purchase and sale of personal property. 


2. Unless such contracts are in writing, or are witnessed 
by a writing setting forth all the essential terms of the contract, 
and are signed by the buyer or his authorized agent, they are 
unenforceable by legal action in practically every state, where 
the value of the goods amounts to the following sums, or more, 
as indicated: 


Alaska, $50; Arizona, $500; Arkansas, $30; California, $200, 
Colorado, $50; Connecticut, $100; District of Columbia, $50; 
Georgia, $50; Hawaii, $100; Idaho, $200; Illinois, $500; Indiana, 
$50; Maine, $30; Maryland, $50; Massachusetts, $500; Michi- 
gan, $50; Minnesota, $50; Mississippi, $50; Missouri, $30; 
Montana, $200; Nebraska, $50; Nevada, $50; New Hampshire, 
$33; New Jersey, $500; New Mexico, $50; New York, $50; North 
Dakota, $500; Ohio, $2,500; Oklahoma, $50; Oregon, $50; Penn- 
sylvania, $500; Rhode Island, $500; South Carolina, $50; South 
Dakota, $50; Utah, $500; Vermont, $40; Washington, $50; Wis- 
consin, $50; Wyoming, $50. 

Unless (a) some part of the price is paid; (b) the goods are 
accepted and actually received by the buyer. 


7 


Survey and Study of Competitive Trade Practices 
in 239 Different Lines of Business 


SECTION THREE CANCELLATIONS AND RETURNED GOODS 


3. When an order is cancelled and the buyer notifies the 
seller. to proceed no farther, while labor or expense is still 
necessary on the part of the seller to enable him to fulfill his obli- 
gations (as where goods are in process of manufacture), the 
seller can hold the buyer lable only for the damages he has sus- 
tained up to the time of cancellation, except that the seller’s 
anticipated profit under the contract is an element entering into 
the total of his damages. 


4. If a cancellation is received after goods have been com- 
pleted, set aside for the buyer, or shipped (as where the buyer 
refuses to accept them from the transportation company), and 
your contract is in writing and otherwise legally enforceable, 
you can notify the buyer that the goods are his, and sue for 
the price. 

The Guarantee As An Invitation to Return Goods: A few 
years ago there were a number of products being merchandised 
where the guarantee was the pivot on which the whole selling 
plan revolved. We can all remember the coupons which we 
used to get with every box of socks, so that we could return the 
socks for new ones if they did not give satisfaction. We can all 
remember when tire advertisements carried a line stating that 
the tires were guaranteed for 3,500 miles, or 5,000 miles, as the 
case might be. We see little of this kind of advertising now, 
and we hear less about the guarantee. The fact of the matter 


is that the guarantee has lost much of its merchandising value. — 


It is in eclipse just as testimonial letters were in eclipse for many 
years after they had been overworked by the patent medicine 
companies, During the last five years the public has been 
educated to the fact that any reputable manufacturer will stand 
behind anything sold under his label. The guarantee goes with 
the brand, regardless of whether or not it is so specified. When 
undue emphasis is placed on the guarantee it is apt to raise the 
question, “Why do they have to lay so much stress on the 
goods being all right?” 

It seems to be the universal experience of the concerns inter- 
viewed that it was bad sales strategy to use any kind of a guar- 
antee that had in it qualifying clauses. These served only to 
nullify the guarantee in the eyes of the purchaser, and in many 
cases even had the effect of arousing suspicions in his mind 
which previously did not exist. Yet it is not always advisable 


8 


Survey and Study of Competitive Trade Practices 
in 239 Different Lines of Business 


SECTION THREE CANCELLATIONS AND RETURNED GOODS 


to back your product by too liberal a guarantee, for it suggests 
and invites the return of the merchandise on the least provoca- 
tion. 


THIS 18 TO CERTIFY that Bareet Lift-Trucks 
Model Niobe 

_..pounds has been rigidly inspected and 
tested as to materials, workmanship and operation befere 
Gener ti a 
‘This equipment is, therefore, guaranteed to give satisfac- 
tion for many years if given but ordinary attention and 
if not leaded in excess of the rated capacity stated above. 


Barrett Lift Trucks are further ee against defec- 


tive workmanship and materials anid we agree to replace 
or repair free of all charges to you, any purt or pets 
proven defective during the life of the equipment. 
Any clitim for repair or replacement must be made im- 
mediately to the factory or to an authorized Barrett 
representative and mist accompany defective parts as well 
as model and serial number of the defective ruck. 
Claims for accident or misuse carat be allowed. 


This guararave signed and sealed 
he 2 dayof. roe 
i. DARRETT-CRAVENS COMPANY 


- 1338 West MONROE STREET 
SCHICAGO, ILLINOIS 


A good form of “life-long” guarantee 


Summing up, we recommend as a rule for the use of the 
guarantee that it be not used unless absolutely necessary, and 
if used that it be made as broad as possible without any “ifs” 
and “excepts.” Omitting these protecting clauses may lay the 
manufacturer open to abuses of the guarantee, but such abuses 
are usually exaggerated. Keep away from the guarantee if you 
possibly can. Its selling value is rapidly waning, and it aggra- 
vates the returned goods problem. 


9 


Survey and Study of Competitive Trade Practices 
in 239 Different Lines of Business 


SECTION THREE CANCELLATIONS AND RETURNED GOODS 


Wording Mail Order Guarantee: Exceptions to the above 
rule, of course, would be mail order houses, and manufacturers 
selling by mail. In such cases the guarantee is a necessary part 
of the selling plan. Because this is so, some mail order houses 
have gone to extremes in guaranteeing satisfaction. No doubt 
this was necessary in the early days of mail order buying. A 
confidence making guarantee is still necessary. Yet we find 
among manufacturers, at least, an inclination to use a time limit 
in such guarantees. A typical illustration of such a guarantee 
policy is that of the Kalamazoo Stove Company, which has the 
following clause in its order blank: 


If I find at the end of thirty days that the article I purchased 
is not exactly as represented by the Kalamazoo Stove Company, 
I shall notify the company immediately. If it cannot satisfy me 
I will then recrate the article and deliver it to the railroad 
freight station where I received it. 


In many cases the matter is fixed to the entire satisfaction 
of the customer, with the latter keeping the goods he wanted to 
return. Time and again the dissatisfaction comes from some 
misunderstanding as to operation or disregard of directions. 
Actual defects in the merchandise are few. After the matter has 
reached the correspondence stage it is often established that the 
people want to return the goods because of a decision that after 
all they cannot afford to buy them. 


Speculative Selling for Deferred Delivery: Your investi- 
gators found that there is a tendency (contrary to the times), to 
encourage salesmen to solicit orders at prevailing prices for de- 
ferred delivery. This is a practice which will be dealt with at 
greater length in a later section of this report. It has, however, 
a vital bearing on cancellations. It must be obvious to all that 
when salesmen are sent out to get orders for future delivery, 
there is a temptation to tell the customer that he can always 
cancel it should he find himself unable to use the full order. 
This gives rise to short rate controversies, and very often results 
in the breaking down of long established customer relations. 


In the long run speculative selling is poor business. It may 
serve to keep out competitors, but even that is doubtful. A com- 
petitive salesman is usually resourceful enough, when he finds 
out that an order has been placed, to find a way out. We find 


10 


)) 


» 


Survey and Study of Competitive Trade Practices 
in 289 Different Lines of Business 


SECTION THREE CANCELLATIONS AND RETURNED GOODS 


among the more astute business men a decided apathy toward 
speculation, even when it comes to ordering their own require- 
ments. The theory is growing that the best policy is to order 
as you go along. Profits resulting from increased valuation of 
inventory are usually equalized when the market settles back. 
In the meantime the management is lulled into a false security 
by virtue of the big earnings shown. 

Too Many Numbers As a Factor: Another cause for a high 
percentage of returned goods is poor arrangement of the line, 
particularly too many slow selling numbers. Too much em- 
phasis cannot be placed on the advisability of concentrating pro- 
duction and sales efforts on a few popular, fast turning numbers, 
and the gradual discontinuance of slow moving numbers. 


I1I—Making Returned Goods a Matter of Negotiation 


A man in business regards his customers as his friends. He 
can easily “sell” himself on an over-lenient policy toward com- 
plaints and returns. He thinks that by following this policy 
he is building good-will and making friends. Nothing can 
be further from the truth. Friendship without respect is indeed 
a friendship built on quicksand. It cannot possibly endure. 
Human nature is the same in dealers and buyers as it is in chil- 
dren or employees. When we find that a concern or a man is 
“easy” our first feeling is one of friendliness. But consciously 


or unconsciously, the very knowledge that this concern are 


“sood sports’ when it comes to taking returned goods back, 
prompts us to take advantage of them. Step by step we en- 
croach on their good nature, until finally a halt has to be called. 
Then what happens? We feel that we are terribly abused. We 
have been educated up to their lenient ways of doing business 
and have been spoiled. In a huff we withdraw our patronage 
and place our orders elsewhere. It is the age-old story. 


There is, we find, a growing appreciation of this truth in 
business, and a steadily growing doubt as to whether or not the 
policy of “the customer is always right” is all that it is cracked 
up to be. In this connection we offer the following testimony of 
a large wholesale house, which has just lately tightened up its 
returned goods policy, with the results given: 


il 


Survey and Study of Competitive Trade Practices 
in 289 Different Lines of Business 


SECTION THREE CANCELLATIONS AND RETURNED GOODS 


We were very lenient with customers who returned goods at first, 
cheerfully accepting losses, thinking that gradually the situation would 
clarify, and that the good-will of the jobber would reimburse us in 
future profitable business. Strange as it may seem, the jobbers with 
whom we were most lenient have failed to become good customers, 
and those with whom we adopted a sterner policy buckled down to 
learn the “game,” instructed their sales forces, and are now doing a 
very fine business in many cases without any worry to us, the manu- 
facturers. 


Our tightening up policy began with letters of protest to the jobbers, 
explaining to them why they were failing, and how serious the matter 
was from the manufacturer’s standpoint. This helped with a certain 
percentage, but others still insisted on sending goods in on slight pre- 
text, or no pretext at all, charges collect, and often in damaged condi- 
tion. . Finally we adopted the policy of receiving no merchandise unless 
permission to return had first been secured from the service depart- 
ment. Goods arriving were refused, and a postal notice mailed the 
consignor stating the case, informing him that the shipment was being 
held by the transportation company, and that we would not pick it up 
unless sent in for repairs, and unless the jobber agreed to stand charges 
incurred, and agreed to the return of the shipment after inspection or 
repairs. 

This policy brought protests, of course, but after the customer 
understood our sincerity and earnest desire to be fair, usually he 
would consent to our terms. Sometimes he would tell us that he was 
through with us, but fortunately by the time this policy was put into 
effect, the trade had begun to appreciate the profit possibilities of the 
line, therefore were not anxious to give it up. 


The result has been an almost complete stoppage of unjustified 
losses, a more wholesome relationship between the factory and the 
jobber, and development of sounder channels of distribution. 


‘When Customer Refuses to Pay the Freight: The foregoing 
experience might indicate that the returned goods problem was 
simply a matter of saying to the customer, “we won’t take them 
back, so there.” Such is far from being the case. A wholesale 
electrical house, where the returned goods problem is a really 
serious matter, had quite the opposite experience than that above 
quoted. An officer of the company reports: “At one time we, 
too, made it a rule not to accept the return of merchandise un- 
less permission had first been given. The shipments that were 
received without the proper tag, indicating that they were being 
returned by our permission were refused. But this we soon 


12 


rs) 


Survey and Study of Competitive Trade Practices 
in 239 Different Lines of Business 


SECTION THREE CANCELLATIONS AND RETURNED GOODS 


found did not work, as the customer would not pay for such 


goods and would simply leave the shipment lie in the freight 


house.” 


This is a situation which must be headed off rather than to 
wait for the goods to be returned and then argue about it. One 
concern reports that it has been able to cut the return of mer- 
chandise in two by packing with each shipment a large warn- 
ing notice as follows: 


SUC 


This shipment was carefully counted and packed and 
you should receive exactly what invoice calls for. If 
there is a shortage, count again to be sure you are 
right and then claim should be filed BY YOU, within 
forty-eight hours. 


If merchandise is shipped as ordered, please do not 
ask us to take it back. The return of merchandise 
should always be a matter of negotiation. Write for 
our permission before returning any merchandise, as 
we cannot accept such shipments unless they carry our 
special returned goods tag. 


PUTT eee 


TUDE EES EEE eee 


SHU eee ee 


Higher Handling Charge for Goods Sent Back Without Per- 
mission: Another concern, in the wholesale drug line, has been 
able to solve this problem by charging the customer fifteen 


' per cent in handling returned shipments made with permission 


of: the house, whereas twenty-five per cent is charged for 
handling merchandise returned without permission. We find 
that nearly all of the concerns we have queried charge some kind 
of a handling charge, usually slightly more than the profit on the 
goods. 

How Manufacturer Can Help Jobber: The advantages of 
any plan that heads off the arbitrary return of merchandise, or 
the arbitrary cancellation of orders, are, of course, evident. In 
many cases it is possible for the seller to dispose of the stock 
elsewhere in the locality. Usually it is possible for the sales 
department to offer some suggestions which will help the cus- 
tomer to dispose of the goods if they are being returned merely 
because they do not move fast enough. It has been found that 


13 


Survey and Study of Competitive Trade Practices 
in 289 Different Lines of Business 


SECTION THREE CANCELLATIONS AND RETURNED GOODS 


half the cancellations and requests to return merchandise can be e 
smoothed out by the sales department. 


NOTICE! ssi 
EFFECTIVE AT ONCE 


RETURN of MERCHANDISE _ 
For credit has become 4 <ertous factor of expense, 


and also is becoming a merchandising oe 
most difficult of solution. 


_In justice to ourselves and to our various Cus- 
tomers, we find it necessary to adopt the follow- - 
ing rules governing the return of merchandise. 


‘€@ NO MERCHANDISE will be returnable for 
credit after haying been in customers posses- 
sion filteen days ogmore. 

@ NO MERCHANDISE will be returnable 
within fifteen days except upon written request 
of purchaser and consent of seller. 

€ NO MERCHANDISE will be accepted for 
credit unless returned in merchantable con- 
dition. 

€ COATED PAPERS and similar products 
can not be returned for credit after having been 
taken out-of original packages. 


BERKSHIRE CO, MIDLAND PAPER CO, 
BRADNER SMITH & CO. MOSER PAPER CQ. 

J, W. BUTLER PAPER CO, THE PAPER MILES CO. | 
CHICAGO PAPER CO. PARKER, THOMAS & TUCKER 
DWIGHT BROS. PAPER CO. PAPER CO, 

EMPIRE PAPER CO. SWIGART PAPER CQ. 
GRAHAM PAPER CO. JAMES WHITE PAPER CO. 
KNOX & WOLCOTT PAPER CO; W. EB. WROE & CO. 
MESSINGER PAPER CO. 


This joint notice by Chicago paper houses proved effective lath 
in cutting down returned goods 


In the case of branded merchandise and specialties sold 
through a jobber, it is often good policy for the manufacturer to 
have the jobber relay requests to return his product to him. The 
jobber is usually glad to do this, and in fact will appreciate the 


14 


) 


) 


Survey and Study of Competitive Trade Practices 
in 289 Different Lines of Business 


SECTION THREE CANCELLATIONS AND RETURNED GOODS 


cooperation. It is to the manufacturer’s interest because it may 
mean the saving of a dealer account. The manufacturer, being 
steeped in the merits of his product, is often able to bring argu- 
ments to bear on the dealer which will completely change his 
attitude toward the product, and in any event will take away the 
lingering bad taste which the slow-moving product has left in 
his mouth. 


IV—Concerted and Group Action to Educate Buyers 


As we have already pointed out in the opening remarks, a 
great deal of the loss incurred, both by the cancellation of orders 
and the return of merchandise, can be traced to the fact that 
buyers have never been taught, or they have found it convenient 
to forget, that a seller is not supposed to cancel orders or accept 
the return of merchandise. During the war a determined effort 
was made in this direction, with considerable effect, by the 
government. But with the growing competition that followed 
the war the work so well started was soon allowed to die. 


In some lines the various local associations have endeavored 
to suggest some standard basis for handling this problem. The 
announcement by the Chicago wholesale paper merchants shown 
in this section is a good illustration of how one industry has 
handled the problem effectively. However, in the uncertainty 
as to how the government would view such concerted practices 
has made this plan less practiced, if not questionable. In a re- 
cent ruling of the Department of Justice in an injunction suit 
against the Tile Manufacturers’ Credit Association, the govern- 
ment held that by means of uniform trade practices the associa- 
tion was endeavoring to maintain uniform trade prices. In the 
decree the government expressed itself as prohibiting the follow- 
ing trade practices: 

(1) To adopt or use a uniform basic price list. 

(2) To fix and adopt list prices for members’ products. 

(3) To establish or maintain uniform prices for their products. 

(4) To fix individual prices that are uniform for all classes of 
purchasers or dealers and for all sales. 

(5) To establish rules or regulations as to the acceptance of orders 

at prices in effect prior to changes in the association’s rules. 

(6) To set up and maintain uniform extra charges for built-up let- 
ters, for numbers or for beveled edges of tiles. 


15 


Survey and Study of Competitive Trade Practices 
in 2389 Different Lines of Business 


SECTION THREE CANCELLATIONS AND RETURNED GOODS 


(7) To establish uniform limitations. on the proportionate amounts 
of the lower grades of tile sold. 


(8) To sell tiles f.o.b. factory with freight equalized with other 
factories in the country manufacturing the same class of product. 


(9) To compile and distribute freight rate books for use in making 
freight equalizations. 


(10) To enforce uniform terms of sale. 

(11) To fix uniform conditions on or for the acceptance of orders. 

(12) To establish and maintain uniform charges for barrels, half- 
barrels or boxes used for shipping tiles. 

(13) To refuse to allow credit for old packages returned. 

(14) To quote prices with package charges included, and to charge 
for packages whether used in shipment or not. 

(15) To establish uniform conditions for the furnishing of tiles for 
sample purposes. 

(16) To refuse to combine less than carload shipments into carload 
shipments invoiced to one of the purchasers. 

(17) To refuse to sell to any persons or corporations because of any 
unpaid account or accounts. 

(18) To formulate and establish conditions to determine whether 
customers shall be excluded from securing credit or impose any limita- 
tions upon the credit granted. 

(19) To restrict sales to dealers or contractors in tile. 

(20) To establish uniform requirements for classification as dealers 
or contractors. 

(21) To adopt any system of cooperative purchasing of raw ma- 
terials or supplies or of cooperative owning of the sources of raw ma- 
terials which would tend to eliminate competition in the purchasing of 
materials and supplies. 

(22) To adopt or use a common trade-mark. 

(23) To pool orders. 

(24) To enter joint bids. 

(25) To prepare and publish any lists of dealers or certified 
dealers. 

(26) To advise or communicate with one another as to proposed 
advances or decreases in prices or to circulate among themselves in 


any way information concerning or relating to proposed advances or 
decreases in prices, or to prices charged or to be charged. 


(27) To discriminate in favor of or against any person or corpo- 
ration for any reason. 


16 


File: 


Section III 


Survey Competitive Trade Practices 


Trade associations, according to a 
government edict, may be used: 


(1) To advance or promote the use of tiles by research, publicity, 
advertising and similar activities. 


(2) To deal with engineering and trade problems for the purpose 
of advancing the manufacture and use of tiles and to secure the arbi- 
tration of trade disputes. 


(3) To carry on educational work pertinent to the industry through 
fellowships in schools and colleges and experimental and research 
work, and the instruction of mechanics and training of apprentices and 
workmen, and to provide for scientific research, lectures and the writ- 
ing, reading and publication of papers on subjects pertaining to the 
industry. 


(4) To maintain a traffic bureau to assist the industry in transpor- 
tation matters before Federal and State commissions, and other bodies 
concerned in questions of transportation and tariff and also with com- 
mon carriers, and, upon request of any member of the association, to 
furnish such member any information relating to rates upon its prod- 
ucts or rules of transportation that may be contained in any public 
schedule or tariff, but all rates furnished shall be the actual rates 
between points of shipment and delivery and shall not be based on any 
fixed or basing point. 


(5) To improve sanitation, safety appliances, working conditions, 
accident prevention, employment, housing conditions, insurance, and 
matters of like character. 


(6) To handle the insurance of its members, including fire, indus- 
trial, indemnity or group insurance. 


(7) To maintain a credit bureau for the sole purpose of furnishing 
upon specific requests information as to the financial standing and the 
credit rating of persons and corporations purchasing or attempting to 
purchase tiles, but not to create directly or by inference a list or class 
of so-called legitimate or preferred dealers or purchasers, The gather- 
ing of information, solely for the purpose of providing credit informa- 
tion on special request, shall not be considered a violation of any part 
of this decree. | 


(8) To secure and maintain the standardization of quality and of 
technical and scientific terms, and the elimination of non-essential 
types, sizes, styles or grades of products. 


17 


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Symposium of Practice in Use of 
Guarantee in Sales Work 


A Large Importing House 


We make contracts both with and without guarantee of the market, 
dependent on the character of the merchandise. The plan works in two 
directions—secures for us business where otherwise we should fail of 
getting it; on the other hand, it sometimes encourages a customer to buy 
beyond his actual needs. We do not encourage them. Our guarantees 
include the provision that in case we are unwilling to meet the quota- 

~ tions of competitors, all other conditions being the same, the customer 
has the privilege of buying of the lower seller and charging his pur- 
chase against our contract quantity. 


Manufacturer of Widely Advertised Confectionery 
We do not guarantee the sale of our products. We do, however, 
guarantee their quality. At times our prices are guaranteed against 
decline for thirty days and during some seasons for a longer period, but 
such guarantee of prices are usually made on seasonable merchandise 
only. As a general thing our sales are made subject to price prevailing 
date of shipment. 


A Large, Well-Known Mail Order House 


Price guarantees are effective on an advancing market. The length 
of time that a price is protected, depends largely on market conditions. 
Guarantee against reduction, is not so desirable, in view of the fact, 
that you are forced to make a reduction on business, that ordinarily 
would have been placed, even though this special guarantee had not 
been given. 

Most of the orders received during a period of declining markets, 
are orders that usually would be received regardless of the special 
offer. 

We have guarantees of satisfaction, both limited and unlimited. The 
guarantee covering a specific item, is usually limited to a certain num- 
ber of years. We have in addition, a “Policy” guarantee of “Complete 
satisfaction, or your money back,” which does not specify a limited date. 


A Widely Advertised Office Equipment 
We do not give guarantees of any kind. We state what our product 
will do and prove that it conforms to certain specifications and tests. 


1 


Food Specialty Manufacturer 


You no doubt refer to guarantees to consumers, for none is practicable 
that applies to-distributors. We have an unlimited money back guaran- 
tee to consumers: they are guaranteed satisfaction or their money is re- 
turned and they keep the goods. We guarantee that the goods will be 
liked by them better than any other brand and that they will be found 
more economical. When either claim is not sustained the consumer’s 
money is cheerfully refunded and again she keeps the goods. The retail 
distributor likes this because we pay him the retail price for every 
money backed sale; he collects direct from us or through our traveling 
representative and in either case a small slip is used for the descrip- 
tion of the article and the quantity, also the price and also the name 
and address of the consumer. The representative calls upon the con- 
sumer when this. is practicable and most of the time he succeeds in re- 
taining a customer not only for our products but for the retailer’s store. 
This guarantee is absolutely unlimited and without strings. 


A Furnace Manufacturer 


We believe that the word “guarantee” is the most abused word in the 
dictionary. We also believe that any good, conscientious business concern 
will cater to its trade; in other words, they will go more than half way 
to, right a wrong.. In our particular line, we make no guarantees as a 

great deal of the results obtained depends largely on the care given our 

product. It is very easy to burn out a firepot or grates by allowing ashes 
to right a wrong. In our particular line we make no guarantees, as a 
fire is burning; or to cover over the cold air return with a carpet, furni- 
ture and so forth. Therefore it makes it next to impossible to guaran- 
tee our product. We will state again that we believe the word “guar- 
antee” the most abused in the dictionary, particularly in our line. 


A Washing Machine Manufacturer 


We use a guarantee bond, which guarantees our machine for the 
period of one year against defective material or workmanship. We 
even go so far as to pay for the mechanic’s time in making repairs, as 
well as repair parts. We send out a postcard with each machine which 
the customer fills out and returns to us, asking for a guarantee bond. 
These postcards are filled out almost 100 per cent. ) 


An Ironing Machine Manufacturer 


Regarding guarantee. We furnish a-written or engraved guarantee 
bond upon request. This is done, however, largely to obtain leads for 
prospects. In other words, for effect only. We guarantee our product 
against defect in material and workmanship without regard to time or 
the printed guarantee. In other words, we would always make good to 
a dealer or to a user any defect in our merchandise reported within 
a reasonable time. Generally, we figure this to be about a year, but we 
have replaced parts at times considerably over this period. We must 


2 


make allowances for the time that the equipment remains in the dealer’s 
hands unsold, but we figure once a machine gets into the consumer’s 


hands a year is ample time to detect any defect, and this is largely what 
guides us. 


Building Material Supply Manufacturer 


Guaranteeing our products is a practice in our industry which has 
been so abused that it has become a farce. The cheapest goods are gen- 
erally sold with the longest guarantees, and while the manufacturers 
themselves are not given to push guarantees and as a rule only offer 
safe, or sane guarantees, the dealers instead of selling goods in some 
cases, sell guarantees. We give, when requested, a safe and conserva- 
tive guarantee, but we stand ready to make good any defective material 
whether a guarantee is issued or not. The amount of guarantees which 
we actually furnish are so few that it is almost negligible. 


A Wholesale Grocer 


We use guarantees—limited guarantees—for instance our canned 
goods are guaranteed against swells to July 1st following the delivery. 

We have a private brand of oats which we guarantee against spoil- 
age. Outside of this there are several guarantees—we have occasionally 
an item which we sell for future delivery—price guaranteed against 
decline. 


A Factory Equipment Manufacturer 


We furnish purchasers of our equipment with a Ninety engraved 
guarantee as to performance of the device. Our guarantee—as you will 
notice—is and is not limited. To boil it down to hard tacks it is nothing 
more than any reputable manufacturer would offer the purchaser of his 
products. However, there are a great many buyers who like this sort 
of thing, so we give it to our men as an added sales argument. As 
you can appreciate, any manufacturer is ready and willing at all times 
to stand back of his product—I should say perhaps any reputable manu- 
facturer. Hence, the guarantee is nothing more than putting in black 
and white what the reliable house will back up regardless of whether 
or not it was in such form. 


ua etal ug aie 


i eet cafeg 
P Ra jar onan Kite pia 


SECTION FOUR 


Trial and Consignment Selling 


Use of Consignment Orders to Dislodge Competitor’s 
Line—Trial Selling as Opposed to 
3 Outright Sales 


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7) 


SECTION FOUR 


Trial and Consignment Selling 


Under What Circumstances Is Selling on Trial Justified— 
Phases of Consignment Selling—Keeping Down 
the Investment in Consigned Accounts 


Copyright, 1924, by J. C. Aspley, Chicago 


costs an increasing amount of interest is being shown by 

sales executives in so-called “demonstration” plans. The 
basic idea behind such plans is sound. It costs all the way 
from one to four dollars for every call a salesman makes. Re- 
gardless of whether the salesman sells a specialty such as add- 
ing machines, or a commodity like pancake flour, a certain 
amount of educational work (calls without orders) must be done. 
Concerns which have kept close tab of their salesmen’s work 
find that on an average a salesman selling an office specialty 


iP AN endeavor to find the answer to steadily mounting sales 


‘must call ten times before a sale can be made. At two dollars 


a call this represents an investment in salesman’s time of no 
less than fifteen dollars. 

Inasmuch as this expense must be made to educate the pros- 
pect, sales managers logically ask: “Would it not be cheaper to 
take this money and put it into trial machines which can be left 
by the salesman at his first call, with the knowledge that a cer- 
tain percentage of these trials will stick?” 

In the same way the commodity sales manager wonders if 
instead of spending all his money in educating new customers 
to appreciate the quick-turning qualities of the line, if it would 
not be more profitable to put a reasonable stock of the goods in 
on consignment, and carry the investment until the dealer can 
convince himself that it is a profitable line to carry. 

These are pertinent questions. They are questions not easily 
answered. In almost any organization you will find salesmen 
divided sharply for and against these demonstration selling 
plans. You will find the executives of leading companies in 
the same field just as sharply divided. In the adding machine 
field for example your investigators found one concern rigidly 


1 


Survey and Study of Competitive Trade Practices 
in 239 Different Lines of Business 


SECTION Iv TRIAL AND CONSIGNMENT SELLING 


opposed to any form of putting out machines on trial, yet the 
leading concern in this field credits its trial policy with much of 
its success. The same holds true throughout the office appliance 
field. There is, on every hand, a great divergence of opinion. 


Effect of Trial Selling on Salesman’s Morale: The principal 
objection in the office appliance field to trial selling is that it 
undermines the fighting spirit of the sales organization. This 
view was expressed by a well-known sales executive in that 
field as follows: 


A trial is obtained principally because the salesman or representa- 
tive requests from the business man permission to place one of his 
devices in the office stating that there is absolutely no obligation on the 
part of the business man and that it remains for the machine to prove 
its worth. 

It is only natural that this method involves a great expense in the 
stock which is tied up in trials and the necessary expense of covering 
depreciation on these trials. This is to say nothing of the loss of the 
salesman’s time in going after and following up these trials. It encour- 
ages weak salesmanship and is a big drain on the business executive’s 
time. Being that the public are more or less educated to this method, it 
requires very little persuasion on the part of the salesman to get per- 
mission to leave one of his devices in the ofhice. That is the beginning 
of an expensive experiment for the salesman himself and the man he 
leaves the device with. He calls back every few days or weeks or 
months, whichever the case may be, and every call means time on his 
part and time on the part of the executive he calls to see. In the end it 
has been proven that but twenty per cent of the trials that are put out 
materialize into sales. 


We are going to consider merely that phase of it which effects the 
manufacturer in such a way that he is compelled to charge on over- 
head for this trial. It is unnecessary to go into details explaining the 
exact cost, sufficient to say that when eighty per cent of a manufac- 
turer’s stock is tied up in something which pays no returns and eighty 
per cent of a salesman’s time is likewise being devoted to efforts which 
could reasonably be developed along other lines, someone must pay. 

A certain manufacturer who has had years of experience in this 
particular business is going to market a néw article under a new plan. 
For obvious reasons it is necessary at this time to withhold the name 
of the manufacturer. It is the plan of this manufacturer to sell his 
device without trial. 

The immediate benefit of the business man is the reduction of at 
least thirty-five per cent of the cost of this device. That, of course, is 


2 


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Survey and Study of Competitive Trade Practices 
in 289 Different Lines of Business 


SECTION IV TRIAL AND CONSIGNMENT SELLING 


J only the part which is recognized in dollars and cents. ‘There is the 
other phase—the executive’s time. 


This manufacturer realizes that there is no need or no reason why 
a salesman who understands the device he is handling should not be 
able to offer it to a business man in such a simple and complete form 
on his first demonstration that there will be no need of a trial. How 
that is to be done is another story. 


This method automatically eliminates the weak type of salesman 
who wastes his own time and the time of his prospects whom he calls 
upon. The manufacturer himself profits, but only in a secondary way, 
and that is because the buyer profits first. 


On the other hand, the sales manager of a well known ad- 
dressing machine company takes the opposite view, and thus 
argues in favor of trials: 


Our records on trials show that more than seventy-five per cent of 
addressographs placed last year on trial were purchased. This per- 
s centage is even higher in respect to hand addressographs placed on 
G | trial. It all depends on how liberal the trial proposition is. We do not 
’ allow prospects unreasonable trial periods. In respect to hand ad- 
dressograph trials, they are limited from ten days to two weeks. If 
decision is not made at the end of that time, we remove the machine. 
In instances where machines were removed and not sold, we were 
surprised to find that a healthy percentage in such cases later resulted 
in straight orders. Orders came through anywhere from three to six 
months later. 


It is true that under certain conditions the trial privilege prompts 
weak salesmanship. But this we do not find to be true in the general 
run among the addressograph salesmen. ‘There are certain reasons 
why, from the standpoint of selling expense, in certain special cases, 
it is better to grant a trial than to do without the order for several 
years. The addressographs are used in a more or less extensive man- 
ner. The cost of addressograph equipment in many cases runs into 
several thousand dollars. Almost invariably the prospect does not feel 
he can possibly use the addressograph—that it is a luxury and some- 
thing he can do without. A trial quickly convinces the saving affected 

- with the addressograph over pen or typewriter methods—results in a 

.) straight unconditional order, which might not have been secured for 
several years to come in case salesmen were not permitted to put a 
small equipment in on a few days’ demonstration. 


When it comes to selling hand addressographs our records show 
that many more of these machines can be disposed of each year. We 
give the prospect a five-minute demonstration in his office, take away 


3 


Survey and Study of Competitive Trade Practices 
in 2389 Different Lines of Business 


SECTION IV TRIAL AND CONSIGNMENT SELLING 


fifty to seventy-five names and addresses from his lists, make up the 
plates without obligation and leave the whole outfit for the prospect’s 
clerk or office boy to use under actual working conditions for a week 
or ten days. Invariably, if the prospect has any actual use for the 
addressograph, and, of course, our salesman does not make a trial 
proposition unless he knows that to be a fact, our salesman is enabled 
to get the order in a few minutes when calling at the end of the trial 
or demonstration period. 

We encourage our salesmen to keep ten or fifteen trial hand ad- 
dressographs in circulation in their territories at all times. Our in- 
structions are: | 

“Take in the machine, give the prospect a demonstration and leave 
it for ten days’ trial. If, at the end of that time, you can’t get the 
order, remove the machine and place it with another prospect. Don't 
allow trials to hang on for an unreasonable time—keep your machine 
moving, if you can’t sell them quickly.” 


This plan enables our salesmen to cover more prospects and auto- 
matically work up more deals and close more orders quickly than 
would be the case if we did not permit them within reason to make 
trial or demonstration offers to their “hard-to-sell” prospects. 


II—Effect of Trial Selling on Salesmanship 


A manufacturer of ball bearings, brought out a point which 
is worthy of more consideration than has been accorded it in 
weighing the evidence for and against trial selling. He reported 
that he formerly supplied manufacturers of machinery with his 
bearings to test out and to try out in their machines. He never 
got anywhere with this sales plan, because it was based on the 
supposition that the buyer wanted to buy bearings of a superior 
quality. It had not occurred to him that his problem was creat- 
ing the want on the part of the prospect for a higher grade 
bearing, rather than merely convincing the man that his bear- 
ings were superior to those he was using. When he discon- 
tinued the trial proposition, and sent his salesmen out to create 
the want in the buyer’s mind for better bearings, it required 
little if any effort to sell the man his bearings. 


The great trend in selling today is toward selling the results 
of what a product will do, rather than what the product is. And 
the first step in selling the results is to create the desire in the 


4 


Survey and Study of Competitive Trade Practices 
in 239 Different Lines of Business 


SECTION IV 


TRIAL AND CONSIGNMENT SELLING 


man’s mind to secure the benefits of those results. When the 
sales plan places its main emphasis on putting a product in on 
trial, it is only natural that the salesman is going to slight this 
most important need of creating the want for the thing he is 
selling. 


A salesman, whose policy is to sell real orders, defines the 
two situations that exist between the real order and a trial, as 
follows: 


“To sell a real order, two minds are involved; the mind of the 
buyer and the mind of the salesman. 


“Selling a trial, however, consists of bringing the company’s 
material to the material of the prospective buyer and letting tests 
or time do the selling. Working with materials is easier than 
working with minds, therefore, selling by trial is easier than 
selling a real order.” 


The Abuse of Trials: It is generally agreed by nearly all 
sales managers in lines where the placing of trials has become 


a generally accepted practice that it is frequently abused. A 


purchasing agent for one company openly boasted at a recent 
meeting that he had been using adding machines in his depart- 
ment for two years at the manufacturer’s expense, simply by 
getting one company after another to put in trial machines. The 
same might be said of typewriters. Any salesman will tell you 
of instances where concerns have asked to have special ma- 
chines placed on trial to tide them over a rush period, and it is 
quite common for buyers to tell the salesman to leave the ma- 
chine for them to try out, just because it offers an easy way to 
get rid of the salesman. It is such abuses as this that is causing 
one of the large adding machine companies to be seriously con- 
sidering the discontinuance of trials. The sales manager of the 
company states that they will probably always give a demon- 
stration of the machine, but that they intend to discontinue 
leaving the machine. 


How Trials Kill Sales: In marketing appliances and prod- 
ucts of a complicated mechanical nature, such as office printing 
machines, automobiles, envelope sealers, etc., it is safe to say 


5 


Survey and Study of Competitive Trade Practices 
in 239 Different Lines of Business 


SECTION IV TRIAL AND CONSIGNMENT SELLING 


that nearly as many sales are lost by leaving machines on trial 
as are made. Any salesman in this field knows that the easiest 
time to trade out a competing equipment is ‘about two weeks 
after its installation. By that time an inexperienced operator 
has usually succeeded in getting the equipment out of adjust- 
ment, with the resulting dissatisfaction from the owner. When 
the machine has been bought outright, this get-acquainted period 
is not serious. But if the machine is on trial, it is ten to one 
that it will be shipped back. Moreover the pickle salesman who 
slyly drops a nail in his competitor’s pickle barrel, and the 
office appliance’ salesman who knows just what spring to take 
off of his competitor’s machine, are not totally ‘extinct. And 
office appliance salesmen are not letting any grass grow under 
their feet. They seem to have an uncanny way of learning just 
where competitors’ machines are in on trial. 


Those companies, like the American Multigraph Sales Com- 
pany, who have discontinued trials, also find another advantage 
in outright selling. It makes it necessary for the salesman to 
demonstrate his equipment in a properly equipped demonstra- 
tion room. The prospect is thus taken away from the interrup- 
tions and distractions of his business. The demonstration is 
made where proper samples are available, and a great deal of 
evidence which could not be carted about from office to office is 
at hand. 


Summing up, it is the opinion of your investigators after 
talking with more than fifty sales executives in fields where trial 
selling is common that so far as meeting competition is con- 
cerned trials are unnecessary, expensive and detrimental to the 
building up of a strong, hard-hitting sales force. There are 
cases, such as the addressograph case cited, where the use of a 
small “sampler” in connection with a trial might be conducive to 
greater volume. But it should be noted that prior to bringing 
out the hand machine The Addressograph Company would un- 
der no circumstances place its equipment on trial, and insisted 
that salesmen bring prospects to centrally located demonstration 
rooms. In the case of typewriters, adding machines and prod- 
ucts which are now in general use we think the use of trials 
should be discouraged with the idea of eventual discontinuation. 


6 


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Survey and Study of Competitive Trade Practices 
in 239 Different Lines of Business 


SECTION IV TRIAL AND CONSIGNMENT SELLING 


III—Consignment Selling to Displace Competition 


It is quite rare to find a thoughtful business man who will 
attempt to justify the practice of consigning merchandise to dis- 
tributors to be paid for when sold. It is obvious that such a 
sales method must be costly, and it is unsound because it makes 
a banker out of a manufacturer. It takes away the incentive 
which a dealer feels to push a product in which his own money 
is invested, and makes it easy for the distributor to carry a 
larger stock than necessary. 


Yet with it all consignment selling is on the increase. It is 
one of the most generally used methods of getting quick distribu- 
tion for a new product, and especially for displacing a com- 
petitor’s stock when the product is marketed through exclusive 
agencies. It is the last mentioned use which is most deplorable. 
A sales manager can make no greater mistake than to encour- 
age his men to trade out a competitor’s stock, or sell it out, 
and put in his own line on consignment. Such sales tactics are 
destructive and wasteful. They serve only to arouse the ire of 
a competitor to a point where he will spend unreasonable sums 
to “get even.” In this getting-even process both you and your 
competitor lose. From a broad standpoint such tactics are to be 
shunned, because the whole action represents waste energy. 
Much better, by far, is it to spend that time and money in creat- 
ing and developing a new sales outlet, instead of merely tearing 
down what some one else has laboriously built up. 


IV—Legal Pitfalls in Consignment Selling 


But leaving aside the uneconomic principles involved in con- 


signment selling, the practice has numerous disadvantages not 


apparent at first glance. Many of these are legal difficulties 
which a manufacturer gets into. In this connection Edward I. 
Devlin, Jr., of the New York Bar, in an article in “Printers’ Ink,” 
says: 

The first point to be examined is the nature of consignment con- 
tracts. Are they conditional sales or absolute sales with a lien for 
the purchase price, or are they merely bailments or contracts of agency? 
Many consignment contracts have been drawn and many courts have 
construed them. As every contract varies to some extent from 


7 


Survey and Study of Competitive Trade Practices 
in 239 Different Lines of Business 


SECTION IV 


TRIAL AND CONSIGNMENT SELLING 


every other, and as the laws and legal decisions. of each state vary 
from those of most other states, no invariable statement can be made 
as to the nature of such contracts. 


As a rule, however, consignment contracts, to be effective in ac- 
complishing their purpose, place title to the merchandise in the manu- 
facturer and possession in the dealer. Generally such contracts are 
either conditional sales, with authority in the dealer to resell, or bail- 
ments with authority in the dealer, or bailee, to resell. 


Conditional sales are those in which title remains in the seller 
until the goods are paid for, while possession is usually in the buyer. 
A bailment consists in placing another in possession of goods with an 
absolute liability, definite or indefinite in point of time, to return the 
goods to the owner. Title, in the case of bailments also, is in one per- 
son, the manufacturer or jobber, and possession in another, the dealer 
or retailer. 

The distinction between a conditional sale and a bailment is that 
the purpose of the former is to pass title eventually to the buyer, with a 
right in the seller to retake the goods or rescind the sale in case of 
default in the payment of the purchase price; whereas the purpose 
of the latter is not to pass title but to have the property returned to 
the bailor. 

Usually the exact thing must be returned, though validity is not 
destroyed if the article is returned in an altered form. By an extension 
of the strict doctrine of bailments, a bailment, with authority in the 
retail to sell, is valid if there is a duty on the part of the retailer of 
turning over the proceeds of the sale to the manufacturer in place of 
the thing bailed. 

The importance of determining whether a consignment contract is a 
conditional sale or a bailment may not at first be apparent. A sales 
manager may well say that as long as he has a valid consignment 
contract it does not matter to him what legal term is applied to it. 
But on further consideration he will discover that it makes all the 
difference in the world. 


Bailments with authority to sell are upheld as valid in most juris- 
dictions and such contracts as a rule need not be filed or recorded to 
be valid against the creditors or the trustee in bankruptcy of the dealer. 


Conditional sale contracts with authority in the conditional vendor 
to resell, however, have caused a mass of confusion. Some states re- 
ject such contracts, whether recorded or not, and in those states it is 
of vital importance that the contract be one of bailment and not one 
of conditional sale. Other states recognize the validity of such condi- 
tional sales if the contracts are properly recorded and in these states 
strict compliance with the recording statutes is essential. A few 


8 


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Survey and Study of Competitive Trade Practices 
in 289 Different Lines of Business 


SECTION IV TRIAL AND CONSIGNMENT SELLING 


i. 
y states, however, uphold conditional sales to dealers even though the 
contracts are not recorded. 

To test the practical importance of distinguishing between a bail- 
ment and a conditional sale, let us suppose that a manufacturer of dry 
goods ships a consignment of merchandise to a dealer, and that after 
the goods arrive at the dealer’s place of business the dealer becomes 
insolvent. In the bankruptcy proceedings which follow, the trustee in 
bankruptcy claims all of the dealer’s stock in trade for the benefit of 
the general creditors. The manufacturer sees his goods, for which he 
has not been paid, liable to be sold to pay the debts of the dealer. It is 
of the utmost importance then to the manufacturer that his consignment 
contract has been drawn so as to be valid against the dealer’s creditors 
in the manner sanctioned by the laws of the state in which the goods 
are located. Otherwise, the manufacturer will lose his ownership of 
the goods and will have to share in the proceeds of the sale of his own 
merchandise, along with the rest of the dealer’s creditors. 


A Case from the Court Records 


3 Exactly this situation confronted Swafford Bros. Dry Goods Co., 

ee in Arkansas. The contract with the dealer was one of conditional 
sale with authority in the dealer to resell at retail. Fortunately for the 
manufacturer, in Arkansas such contracts are held to be valid and the 
manufacturer can recover from the dealer’s assignee or from his trustee 
in bankruptcy the proceeds of sale at retail, if identified, and any con- 
signed goods remaining unsold. And in this state he is protected with- 
out even recording the conditional sale contract. But with the same 
contract this same dry goods company would not have fared so well 
in New York or Indiana. 


The courts of these states have come to a surprisingly different con- 
clusion. They hold that a conditional sale, with authority in the dealer 
to resell, is inconsistent with the retention of title to the merchandise in 
the manufacturer and is a fraud on the creditors of the dealer. What- 
ever may be said for the soundness of the first reason for this doctrine, 
it is dificult to see how any fraud on creditors is produced if provi- 
sion were made for recording the contract. No such provision exists, 
however, and the contract is fraudulent whether recorded or not. This 

is a very stringent rule. 
? Michigan steers a middle course and there the manufacturer can 
. file his conditional sale contract in the manner provided for filing 
chattel mortgages, and if he does so it is valid and the goods consigned 
are beyond the reach of the creditors of the dealer. 


Of course, the contract most advantageous to the manufacturer is 
one of condition sale. It is better than the bailment or agency con- 


9 


Survey and Study of Competitive Trade Practices 
in 289 Different Lines of Business 


SECTION IV 


TRIAL AND CONSIGNMENT SELLING 


tract because the dealer may be held absolutely liable for the purchase 
price and the goods consigned can still be protected from seizure by 
others while in the hands of the dealer. But in the states which do not 
allow a conditional sale with authority to resell, or in those states 
which require the recording of such contract, the only recourse of the 
seller is to record the contract, in the latter case, or to use a bail- 
ment or agency contract. 


Strange though it may seem, however, the difficulty which usually 
arises is in determining whether or not the contract is one of bailment 
or conditional sale. When a dealer, holding goods on consignment, 
has become insolvent, or when a creditor seeks to enforce a judgment 
against the consigned goods a legal battle frequently ensues. The 
manufacturer usually claims that the contract is one of bailment, with 
authority to sell, because if it is, the manufacturer is protected. The 
creditor or trustee in bankruptcy, unwilling to see the goods which have 
been in the possession of dealer, and in reliance upon which, perhaps, 
credit has been extended to the dealer, given up to the manufacturer, 
urges upon the court the theory that the contract is one of conditional 
sale. 


Undoubtedly one would imagine that there should be very little 
difficulty in determining whether a contract was one of bailment or 
of conditional sale. Yet the determination of this question is often 
very troublesome. The exact nature of the contract, of course, is deter- 
mined by the provisions of the contract itself, construed in the light of 
the interpretation given to similar provisions by various courts. But, 
unfortunately, no universal rule can be laid down, because courts of 
various states are at liberty to interpret, and actually do interpret, 
identical provisions in different ways. It is of vital importance, there- 
fore, that the consignment contract be drawn with particular atten- 
tion to the laws and decisions of the state in which the merchandise 
is to remain. 


An Arbuckle Coffee Case 


Arbuckle Brothers Coffee Company consigned coffee to dealers and 
in the consignment contract provided that the coffee must be paid for 
by the dealer within sixty days whether resold or not. There was no 
stipulation in the contract for the return of the coffee to Arbuckle 
Brothers if unsold. In several states the coffee company was com- 
pelled to suffer the loss of its goods because the courts construed the 
absolute liability of the dealer to pay for the goods, and the failure to 
provide for their return to the manufacturer, as constituting condi- 
tional sales rather than bailments. And this was so even though the 
contract in question was termed a factorage agreement and the parties 


10 


<<? 


Survey and Study of Competitive Trade Practices 
in 239 Different Lines of Business 


SECTION IV TRIAL AND CONSIGNMENT SELLING 


) were referred to as “factor” and “agent.” But in legal contemplation, 
such terminology is by no means conclusive on the question of the 
nature of the contract and the courts reach their decision on the terms 

of the contract rather than on the terminology. 
Suppose, however, the Arbuckle company had provided for a re- 
turn of the goods to the manufacturer but gave the dealer an option 

to pay for them if he chose not to return them. 


The Mitchell & Lewis Co., Ltd., wagon manufacturer, was brought 
face to face with the problem of answering this question in a case 
which involved a consignment shipment of wagons to a dealer in 
Hlinois. Fortunately for the wagon manufacturer, its contract did not 
precisely give the dealer such option, but the court stated the Illinois 
rule to be that where the dealer has an option to purchase prior to 
resale, even before the option is exercised by the dealer, the consign- 
ment contract is converted from one of bailment into one of sale. This 
Illinois rule appears to be exceptional, however. Generally, if the option 
be given the manufacturer to compel the dealer to purchase the goods 
held by him on consignment, or if the option be given to the dealer to 

> purchase the goods before he has sold them, the contract, provided the 
> other essential elements are present, is held to be a bailment—at least 
until the option is actually exercised. 


The Chase-Hackley Piano Company was involved in a case under 
this general rule. Its consignment contract provided that if any piano 
was unsold for a period of six months, the dealer would pay for it 
at the option of the piano company. The case was tried under Georgia 
law and the piano company was protected against the claims of the 
dealer’s trustee in bankruptcy, the court stating that the manufacturer 
would have been equally protected had a similar option to purchase 
been given the dealer. 

It would appear that a consignment contract can in most states be 
treated as a bailment, even though the manufacturer can compel the 
dealer to pay for the goods prior to resale. However, as the essence 
of a bailment is the right to compel the return of the article bailed, 
how can a consignment contract retain its status as a bailment when 
the goods have been sold by the dealer? Obviously they can no longer 
be returned to the manufacturer. In fact, the primary object of the 
consignment would be defeated if they were so returned. 


3 United States Supreme Court Rules on Consignment Selling 


The Supreme Court of the United States has solved this question— 
at least it has come to a conclusion with which it is apparently satis- 
fied. This highest tribunal in the country has ruled that the duty of 
returning the goods to the manufacturer being established, it matters 


11 


Survey and Study of Competitive Trade Practices 
in 239 Different Lines of Business 


SECTION IV 


TRIAL AND CONSIGNMENT SELLING 


not that the goods are returned in an altered form. In other words, 
title to the consigned goods remains in the manufacturer, and when the 
goods are sold by the dealer at retail, title to the proceeds of the sale 
is in the manufacturer. The manufacturer, therefore, still retains title 
to the consigned goods or their proceeds, the latter being considered 
as being the consigned goods in an altered form. Of course it follows 
that if the manufacturer can compel the return of the consigned goods 
he can equally well compel their return in an altered form. 


The altered form may be cash, and if it is, so much the better for 
the manufacturer. It may also be in notes or other evidences of in- 
debtedness. In either case the contract must be carefully drawn so as 
to eliminate all doubt of the manufacturer’s title to the proceeds. 


A Summary 


To sum up, therefore, there are certain salient points to consider in 
consignment selling: 


The most vital point is, of course, the state in which the dealer does 
business, since the goods will be in the dealer’s possession and the 
manufacturer’s rights will be governed by the laws of the state in 
which the goods are attached. 

The next thing to decide is whether the laws of the state in which 
the dealer will have possession of them permit a conditional sale with 
authority to resell. If such sales are held valid against third parties, 
then certainly the consignment contract should take the form of a con- 
ditional sale, though strict attention must be paid to the filing and record- 
ing laws. However, in a state in which such conditional sales are held 
invalid as. to third parties, then the consignment contract must contem- 
plate a bailment for sale. And if a bailment is necessary to protect the 
manufacturer, the laws of the state in which the goods are to remain 
must be carefully considered in order to be absolutely certain that the 
consignment contract proposed will be construed as constituting a bail- 
ment and not a conditional sale. 


V—Holding Down Capital Investment in Consigned Goods 


Since the Federal Trade Commission has taken its stand 
against practically every effort made by a manufacturer, in any 
form, to control the resale price, a number of concerns have 
turned to consignment selling, under an agent’s agreement. 
While the loss from thus having to carry the stocks of thou- 
sands of customers has been great, it seemed to present the only 
practical means available for controlling the actions of distrib- 


12 


te 
" 


Survey and Study of Competitive Trade Practices 
in 239 Different Lines of Business 


SECTION IV TRIAL AND CONSIGNMENT SELLING 


utors. Since the title to the product remains with the manu- 
facturer, he has full right to set the price at which his agent, 
the dealer, must sell the merchandise. In this use, the plan of 
selling on consignment is justified. Concerns who use it, report 
favorably on the results, although all would prefer to shift the 
financial burden onto the distributors. Only a very wealthy 
company can operate under the plan on an extensive scale. And 
even they are often concerned with the financing of an unneces- 
sarily large stock on the dealer’s shelves, due to the desire of 
the salesman to make a showing, and the desire of the dealer to 
carry a full and complete stock, since none of his money is to 
be invested. 


This last mentioned difficulty is one of concern to a number 
of manufacturers. It is a difficult matter to control from head- 
quarters, although past sales records give some of the needed 
information. Possibly the best plan which your investigators 
found was that of an electric lamp manufacturer who had 
worked out a compensation plan for his branch offices, by which 
each office was charged with the interest on the consigned stock 
in his territory. The manager’s profits were thus directly de- 
pendent not only upon his selling a satisfactory volume of lamps, 
but upon his selling this volume with the least investment in 
consigned merchandise. 


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Sample License Agreement 


This Agreement, made and entered into this 


oe ae a Uayror 5 2H Leer ee ee eh ye rand. between 


ALLYN APPLIANCE COMPANY, a corporation duly 
organized and existing under and by virtue of the laws of 
the State of Maine and having its office and place of busi- 
ness at Chicago, County of Cook, and State of Illinois, 
hereinafter called the “Licensor,” party of the first part, 


Eg gon a ented ob atime becoming lhc Kena of the city of 
Mer Se ce ik ren talent 4. cee tes ee MEreinater 


called the “Licensee,” party of the second part, WIT- 
NESSES THAT for and in consideration of the covenants 
and agreements of the license, hereinafter contained well 
and truly to be kept and performed, the Licensor hereby 
grants Licensee a sole license for a period of three years 


CLOT. co eae ST ee eae Oe to sell ALLYN 


APPLIANCES as per initial order forming part of this 
contract, in the following named territory and none other, 


TIS MEl Ce oh ee ee ee. Cee ee 


6S Whe) 6. 8 6 6S mh Oe) Hin, Bs 0) (6.0 0) 046) (058) ©) 18 SL Reales 6 -o. BeLe) & 6 6) 648656). .0).6, & b5) 050: 6) Op Om ek o, @ & Aue) co 
SCs Phe e) Mh he Set we, © el 0 6 Ne ke, 2 TOAe ele Gus @) es ke a  S).fe 6 we 8 2 eal 6. ce 0 le oe © 6 els sa) Sone 


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subject, however, to the performance by the Licensee of 
the covenants and agreement hereinafter contained which 
are made conditions of this license and of the right of sale. 


1. The Licensee agrees to sell for the Licensor during each period 
of this agreement gross worth as follows: 


WWGRES ONC os ccs, Husa the Beye nse eeseta ts I GRC SPOS AVG ith cde cle eo Ge 
SECO “Mein a sah et wc Mote n ts eas ae SOOO MG eso hO ny etc mae eae ons 
BaRETC Se ed cicth. Uo cent ex ae, ee es eee OAR Mugen yt aes Oe eg sa a 
BextROUL UAVS > eee os ate eee Pa OP TON gis cg eitn! (te Cane oP ane eee 
a iia bts acest atrial oh ees S36 Pe pet ee phere eae co ee 
Pr BK pate rales Sh gverid win Ria bs sinters Soe G Die wy winks Mariah ae 2 erie acura 


and should the Licensee in any specified period, fail to sell, on the 
terms hereinafter agreed upon, his said allotment for any period, then 


15 


the Licensor, at the expiration of any said period may terminate this 
license and license others for said territory. 


2. The Licensor will pay a commission of ten per cent on all sales 
from said territory to Dealer or Jobber, and will pay forty per cent 
commissions on all sales made by the Licensee to Consumer. 


3. The Licensee agrees to sell at the retail prices furnished 
from time to time by the Licensor. 


4. It is agreed by both parties hereto that all goods shipped to 
Licensee or purchaser under the terms of this contract are to be 
shipped transportation charges paid by the purchaser. 


5. It is agreed by both parties hereto that all the goods shipped to 
said Licensee under the terms of this contract are and shall remain the 
sole property of the Licensor until said Licensee shall have paid the 
full purchase price of said goods to the said Licensor. 


6. The license shall be personal to the Licensee and not assign- 
able by the Licensee without the previous written consent of the 
Licensor. 


7. The Licensor agrees that in case it shall sell its business to a 
third party, it will by the contract of sale provide that the purchaser 
shall perform this contract according to its true tenor and effect. 

8. It is agreed that breach of this license in any point shall entitle 
the Licensor to revoke this license by notice in writing, and that leni- 
ency or waiver of the right of revocation in particular instances shall 
not obligate the Licensor to further leniency or other waivers in the 
event of subsequent breaches. 

IN CONSIDERATION of the license herein granted, and of the 
covenants and agreements of the Licensor hereinbefore expressed, the 
Licensee, through his own investigation and judgment, without outside 
influence, accepts the said license subject to each and every one of the 
terms, conditions, restrictions and limitations herein contained, and 
agrees fully and truly to perform and abide by all and singular the 
terms and conditions of this license and agreement. 


IN TESTIMONY WHEREOF, the parties have hereunto set their 
hands as at Chicago, Illinois, the day and year first above written. 


ALLY N_ APPLIANCE COMPANY, 


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‘SUPPLEMENTARY NOTES 


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SECTION FIVE 


Discount Rates and Terms 
of Sale 


| Methods of Obtaining a Larger Unit of Sales Without 
P) Resorting to Quantity Discounts and 
ine Extended Billing 


ey 


is 


gan - 


— 


SECTION FIVE 


Discounts and Terms of Sale 


Is the Importance of Quantity Discounts Overrated? Terms 
of Sale in Various Lines of Business—The Use and 
Abuse of the Cash Discount—The Problem 
of Unearned Discounts 


Copyright, 1924, by J. C. Aspley, Chicago 


UST how useful is the quantity discount in meeting compe- 
tition? This is a question which is splitting directorates 
these days, and bids fair to become of increasing moment as 

competitive conditions grow. 


There is one school which holds that quantity discounts 
encourage larger orders and competition is shut out to a greater 
degree of certainty. Secondly, larger discounts attract business 
from the more desirable distributors who control the bulk of 
the business. The advocates of quantity discounts hold that a 
dealer is more likely to push a product on which he is heavily 
stocked, and once he learns how easy the product is to sell he 
keeps on selling it. 


The action of the Wahl Company, makers of Eversharp 
pencils, in going from a flat to a quantity discount basis last 
year is pointed to as evidence of the value of this plan. In this 
instance we have a pioneer manufacturer, whose policies were 
formulated when competition could be disregarded, endeavoring 
to check the onrush of a host of competitors and patent pirates. 


The Wahl Company’s New Plan: The Wahl sales for 1923 
were $184,326 less than they were in 1922. To arrest this decline 
the Wahl directors decided upon a series of special quantity dis- 
counts, contingent upon the dealer buying a given amount of 
pens as well as pencils. This discount amounted to an average 
increase in margin of seven per cent. While it made a bad nick 
in the Wahl profits for 1923, which were $444,160 under 1922, the 
stockholders accepted a dividend cut of $2.00 a share, hoping 
that this added discount will drive competition out of the field, 


1 


Survey and Study of Competitive Trade Practices 
in 239 Different Lines of Business 


SECTION vl DISCOUNTS AND TERMS OF SALE 


stock up the dealers so that they will give more thought to mov- 
ing the Wahl products, and increase the volume from that 
twenty per cent of their customers who do eighty per cent of 
the business. 


Whether this will be brought about remains to be seen. It 


may have just suchan effect, but what is more likely it will invite 
reciprocal discount cutting from competitors, some of whom are 
well financed. If that happens little will be accomplished by the 
move. But either way, the Wahl Company’s action is an indica- 


tion of the growing tendency to manipulate, upwards and down- - 


wards, the rates of discounts. 


This manipulation is not only due to stiffening competitive 
conditions, but in an even greater degree to the growing realiza- 
tion in many lines that the dealer must make more money. This 
is especially true where a concern, by virtue of heavy national 
consumer advertising, is able to dictate the dealer’s profit. These 
advertising manufacturers are awakening, none too soon, to the 
fact that by forcing dealers to carry an increasing percentage of 
stock at a discount which yields less than their operating costs, 
they are rapidly depleting their avenues of distribution. While 
these advertisers think they are making money by hammering 
down the retailer’s margin, they are in reality undermining their 
own success by opening the doors for all sorts of chain stores 
and similar price-cutting competition who are rapidly driving 
the legitimate service retailer out of business. 


II—Advantages of One Discount to All 


It is not within the province of this survey to say at what 
rates of discount any product must be sold. But our inquiry, 
both among manufacturers and among retailers, forces us to the 
opinion that the power of consumer advertising is abused by a 
great many concerns who use it to create a price monopoly. 
Prices to the consumer are raided to the limit, and discounts to 
the dealer are cut to the limit. These concerns think they are 
clever in doing this. They seem totally unable to grasp the fact 
that ultimately this policy, if allowed to extend and develop, 
would bring ruin to the existing distributing machinery. 


2 


a 


@ 


Survey and Study of Competitive Trade Practices 
in 239 Different Lines of Business 


SECTION V DISCOUNTS AND TERMS OF SALE 


However, it should be noted that the Wahl Company has 
granted the increased discount in the form of an extra conces- 
sion to the dealer who buys in the largest quantity. While we 
hardly feel competent, without more information, to question 
the judgment of the Wahl directors, it seems to your editors that 
any policy which builds up the big retailer at the expense of 
his smaller competitor is unwise. It may be argued that there 
are too many retailers. But it is questionable whether the pur- 
pose of a manufacturer dependent on free competition and thor- 
ough distribution is best served by putting a tax on the smaller 
merchant. 


The Studebaker Corporation’s New Policy: The need of 
strengthening the position of the small dealer is one of the big 
problems in competitive selling which is receiving too little 
attention. It is significant that on January first, Studebaker 
changed its discount policy with that end in view. Under the 
new Studebaker discount policy a sliding scale of discounts, 
ranging from eighteen to twenty-five per cent, according to the 
number of cars a dealer purchased, has been abandoned. In its 
place there has been adopted a flat discount applying alike to 
all dealers, carrying an extra premium of one per cent only for 
large volume above a fixed quantity for each model. Referring 
to the change in policy, President E. A. Erskine of the Stude- 
baker Corporation said: 


“Studebaker wants its little dealers to be successful,” Erskine says. 
“We want them to make money. We believe that the new plan is a 
step toward insuring the success of our smaller dealers because under 
it we are not paying a premium for quantity and penalizing the dealer 
in a small city or town with a limited buying power, who sells approxi- 
mately up to 100 per cent of his opportunity.” 


In gathering the data for this section your investigators 
talked to a number of manufacturers who have recently discon- 
tinued the practice of giving quantity discounts. Nearly all of 
them agree that the dropping of the quantity discount has in no 
way hurt their sales. An exception was a concern in the food 
product line. Dropping the discount may have made it a little 
more difficult to sell, but that was a transitory condition, which 
passed once the policy was established. While some of the 
manufacturers reported the loss of a few large accounts, they 


3 


Survey and Study of Competitive Trade Practices 


SECTION V DISCOUNTS AND TERMS OF SALE 


agreed that the loss in profits from these accounts was not nearly 
as large as the gain through the saving of the discount and the 
increased good-will among the smaller customers. 


Unwholesome Effects of Quantity Discounts: Quantity dis- 
counts have the undesirable effect of tending to concentrate the 
output in fewer outlets. Instead of a concern spreading its 
volume out among a large number of distributors, quantity dis- 
counts exert a constant pull toward large orders from a few big 
customers. Much is to be gained by having a larger number of 
smaller buyers, particularly insofar as the entrenchment of 
good-will is concerned. | 


For example, we found a concern that two years ago estab- 
lished a special quantity discount to attract orders from the 
large mail order houses. It was felt that a certain amount of 
this business was desirable, as it would keep the factory operat- 
ing at top capacity. The discount was accordingly made quite 
large—larger than it should have been. Within six months this 
concern was practically on the payroll of one large Chicago 
mail order house. It was profitable business, in spite of the low 
price, as no selling expense was incurred. Two months ago 
the mail order house found another manufacturer who was will- 
ing to shade the price a little—just enough to make it unprofit- 
able for the first mentioned manufacturer to continue the busi- 
ness. Now this manufacturer is spending a small fortune in 
selling expense and advertising in an eleventh hour attempt to 
regain his neglected dealer market. Whether he will be able to 
do so or not remains to be seen, but if you deduct his present 
staggering selling expense from the profit he made on the mail 
order house’s business it would put an entirely different light 
on the situation. Discount policies should always be designed 
for their ultimate effect, rather than for the immediate attrac- 
tion of orders. 


Il1I—The Degeneration of the Cash Discount 


In making this survey there was no subject which came up 
more frequently than the taking of unearned cash discounts. It 
was the general feeling that buyers were fast coming to regard 


4 


Survey and Study of Competitive Trade Practices 
in 239 Different Lines of Business 


SECTION V DISCOUNTS AND TERMS OF SALE 


the cash discount as a trade discount, and the complaint was 
general that customers were paying bills all the way from a week 
to a month later than the expiration of the discount date and 
deducting the discount. When the matter was taken up with 
them, and it was pointed out that this was a financial discount 
and not a price concession, the customer took the stand that 
other concerns allowed them “a little leeway” in this matter, 
and in many instances were able to show invoices from com- 
petitors where unearned discounts had been allowed without 
question. This was especially true in lines where the industry 
was not organized, and where competition was especially keen 
such as in the jobbing field. 


Effect of Loose Discount Policy on Buyer: One hardware 
jobber, located in the Southwestern section, openly boasted that 
he used a code symbol on his purchase ledger to indicate how 
much time he could take on purchase invoices, and still deduct 
the cash discount. It is interesting to note that this jobber re- 
ports that more than half of the concerns from whom he buys 


goods, will pass a bill on which an unearned discount has been 


taken, rather than fuss about it. They also report that once 
such a practice has been established, it is seldom that any further 
difficulty is experienced. This concern also makes it_a business 
to advise the concerns with whom it does business that they 
expect to take thirty days to pay the bill, and that it is customary 
for them to receive the two per cent discount just the same, even 
though the manufacturers’ terms might be two per cent ten days. 


Uniform Terms Needed: Another hardware jobber com- 
plains about the lack of standardization of terms. He says: 
“Discount rates and terms are very interesting to us. Our large 
number of factories use a wide range of discounts and we would 
certainly like to see some move which will bring them to the 
same basis, or at least nearly so. Some of our factories allow 
one per cent cash ten days, thirty days net; some two per cent 
cash for ten days, sixty days net; whereas all our goods are billed 
uniformly, allowing the dealer two per cent for cash in ten days 
or sixty days net.” 


Survey and Study of Competitive Trade Practices 
ain 239 ae Lines of Business 


SECTION, a DISCOUNTS AND TERMS | OF SALE 


To The Payee: Please insert on your ledger page. 


Settlements of accounts payable are made promptly, following ~ 4 
receipt and audit of your monthly statement of all purchases made 
during the month. Payments are not made by separate cheoks fcr 
each invoice, but the whole is cleared monthly and discount is Eekee 
at time of monthly payment. We have made this arrangement with 
leading eastern manufacturers and hope to have your co- operation, 

_ Hennepin Hardware Company, ee 
August ,1922 909-913 Hennepin Avenue, _ _ Se 
Treasurer oo — - Minneapolis, Minnesota, a 


oh Saas aa GS AS Se a SAN a eS Ee SS ae erwcwem cent 


Slips, like the above, printed on check paper, are furnished concerns from 
whom this company buys merchandise with the suggestion 
that it be pasted on their ledger sheet 


Even the most casual inquiry into this matter of cash dis- 
counts reveals a woeful lack of general understanding among 
buyers that two per cent ten days, net thirty days, is equivalent 
to thirty-six per cent per annum on their money. There is an 
equally deplorable lack of understanding on the part of sellers 
who endeavor to use a slightly increased cash discount as a sales 
lever, that three per cent ten days, net thirty days, is equivalent 
to fifty-four per cent per annum on the money. In this connec- 
tion the following table may be useful: 


14% 10 days—net 30 days = 9% per annum 
1 % 10 days—net 30 days = 18% per annum 
144% 10 days—net 30 days = 27% per annum 
% 30 days—net 4 mos. = 8% per annum 
Yo 10 days—net 60 days = 14% per annum 
Yo 30 days—net 60 days = 24% per annum 
% 10 days—net 30 days = 36% per annum 
% 10 days—net 4 mos. = 10% per annum 
Yo 30 days—net 60 days = 36% per annum 
Yo 10 days—net 30 days = 54% per annum 


bo 


WW 0 W KH bd bs 


Small Cash Discount As Good As Large One: After talking 
to a great many business men, and considering this question 
from all angles, we are of the conclusion that the value of the 
cash discount is overrated. Theoretically it would be much bet- 
ter to keep accounts liquid by the use of trade acceptances. 
However, as there seems to be some opposition to the use of 


6 


rs 


Survey and Study of Competitive Trade Practices 
in 239 Different Lines of Business 


SECTION V DISCOUNTS AND TERMS OF SALE 


trade acceptances, because they resemble notes, we believe that 
a uniform discount rate of one per cent ten days, thirty days 
net, would serve the purpose of getting the money in, just as well 
as two per cent for cash in ten days. 


One per cent for cash in ten days, is equivalent to eighteen 
per cent per annum on the money, which is three times as much 
as a customer has to pay for the money at his bank. If a con- 
cern is in a financial position to discount it will usually take one 
per cent, just as quickly as two per cent. If it cannot discount, 
you will not get the money in any event. There is no good rea- 
son why a sound business enterprise, enjoying good banking 
connections, should pay thirty-six per cent for its money. When 
it comes to paying fifty-four per cent, as in the case when terms 
are three per cent for cash in ten days, one is inclined to wonder 
why it is necessary. Certainly it does not reflect on the financial 
stability of the business. 


Enforcing the Terms of Sales: It comes to our attention ina 
number of industries, particularly in the furniture and tire indus- 
tries, concerns nominally have the same prices as their com- 
petitors, but make their discounts and terms elastic, and their 
salesmen are even advised to state to a customer that they can 
pay the bill when convenient and take the discount. We can- 
not warn against this practice too strongly. It tends to demoral- 
ize the whole industry, makes it just that much more difficult 
to do business, and breeds nothing but contempt for the seller 
in the buyer’s eyes. While some unpleasantness is natural when 
terms of sale are enforced, in the long run such a policy is the 
only policy to follow. It makes the seller respected by the 
buyer, and advertises the fact that the company is not one which 
can be trampled upon with impunity. No man respects a weak- 
ling—either in men or in a business organization. 


How to collect the discount is a matter which must be settled 
according to the peculiarities of your own business. Our in- 
quiry, however, indicates that the prevailing practice is against 
the return of the check, as that only unnecessarily aggravates a 
customer, but to write him first stating your policy and if re- 
peated charge his account. If the check reads in full settlement 
of account, then it should be returned. Many concerns report 
that these matters are always handled through salesmen, and 


7 


Survey and Study of Competitive Trade Practices 
in 289 Different Lines of Business 


SECTION V DISCOUNTS AND TERMS OF SALE 


only in extreme cases are customers written direct by the credit 
department. The general policy seems to avoid as much as pos- 
sible, correspondence going out from the credit department to 
customers in good standing. 


Selling the Customer on the Idea of Being Fair: As in so 
many other things much of the trouble experienced in regard to 
unearned discounts, both cash and trade, can be handled before 
the horse has been stolen, better than afterwards. In this con- 
nection W. H. Upson, -Jr., secretary of the Upson Company, 
Lockport, N. Y., writes: 


“For months we have been badly bothered by dealers making unau- 
thorized and unwarranted deductions from their remittances. Some 
would allow their accounts to run thirty and even forty-five days and 
then deduct their cash discount, despite the fact that their shipment was 
sold under uniform terms of two per cent for cash ten days or thirty 
days net. Others made deductions for freight on the plea that they 
understood they were buying on a delivered basis. So it went through 
a long list of alibis despite the fact that every buyer signed our type 
of order form which clearly set forth the conditions under which the 
sale was made. 


“Tt was a problem to know how to handle these deductions because 
in many cases they were made by concerns whose patronage we wished 
to maintain. Salesmen gracefully backed away from adjustments, 
claiming that to enforce payment would mean loss of the customer. 


“The answer was finally found in the little sticker enclosed and the 
booklet. They have reduced these deductions during the past six 
months approximately ninety per cent.” 


A Booklet That Heads Off Discount Squabbles: The book- 
let used by the Upson Company is entitled: “The Square Deal 
Means Both Parties.” It fits into a No. 10 envelope, and makes 
sixteen pages. It is a frank attempt to sell the customer on 
the square deal policies of the Upson Company, and asks in re- 
turn the same fair treatment from the customer. For the bene- 
fit of those who wish to get up a similar booklet, we will quote a 
few sections merely to illustrate the method of treatment: 


THE BUYER CANNOT CLAIM PRIVILEGES DENIED THE SELLER 


On the other hand—and get this from the standpoint of the seller 
who may be a manufacturer like ourselves—that same retail dealer 
may entirely forget his obligations in the transaction. 


8 


€° 


e) 


Survey and Study of Competitive Trade Practices 
in 289 Different Lines of Business 


SECTION V DISCOUNTS AND TERMS OF SALE 


He may ignore the terms of payment under which the goods were 
bought, or by insisting upon some terms to which he may think he is 
entitled— 


—may claim an entirely different price from that quoted by the 
salesman or in the printed price list of the seller; 


—may make unauthorized deductions for freight, damage, or over- 
charges regardless of whether or not he bought the goods f. o. b. 
shipping point; 


—may unjustly make deductions for quality without submitting 
details to substantiate his claim; 


—may purchase other products of the same nature without notice 
to the seller even while claiming exclusive privilege on the seller’s 
goods; 


—may demand the fulfillment of some unreasonable promise at- 
tributed to an innocent salesman who never made the promise; 


—may insist upon some implied exclusive right which he imagines 
ought to be granted to him—and so on through a long list of demands 
which he feels that as a customer “he can get away with” because the 
seller will probably not care to lose his business. 


NO CONTRACT OR AGREEMENT VALID IN LAW UNLESS 
CONDITIONS ARE MUTUALLY EQUITABLE 


It certainly is neither fair nor just for the buyer to hold the seller 
religiously to his part of the agreement and then feel free himself to 
take any liberty he may please. “What is sauce for the goose is sauce 
for the gander!” 


If the buyer places his order under the standard terms of the seller 
'—say two per cent for cash ten days or thirty days net—the buyer has 
no right later to take terms of thirty, sixty or ninety days or two per 
cent on arrival of car on the theory that the seller may accept the re- 
mittance rather than lose the buyer’s business—or because the buyer 
may happen to belong to some association or group who have arbi- 
trarily adopted terms other than those of the seller. 


WHERE CAN YOU MAKE MONEY AT THE RATE OF 
THIRTY-SIX PER CENT PER ANNUM? 


Take our terms of two per cent for cash ten days from date of 
invoice or thirty days net. 


These terms mean that if the bill is paid within ten days after the 
date of invoice, a two per cent discount may be deducted from the face 


, 


Survey and Study of Competitive Trade Practices 
in 239 Different Lines of Business 


SECTION V DISCOUNTS AND TERMS OF SALE 


of that invoice. They mean that the full amount of the invoice is due 
and payable thirty days from date of invoice in case the discount is not 
accepted. 


The regular terms of that invoice, then, are thirty days net. A 
cash discount is offered for the sole purpose of promoting the turnover 
of money, and to induce the buyer to anticipate the maturity date of 
the bill. 


To amplify this thought, the cash discount simply means that the 
seller is willing to allow the buyer two per cent for sending his money 
twenty days before the expiration of the thirty day period of maturity. 


This gives the dealer an inducement of thirty-six per cent a year. 
For it can readily be seen that there are eighteen periods of twenty 
days each which might be anticipated by the buyer if he were having 
shipments made to him constantly throughout the year. In other 
words, if we divide the 365 days of the year by twenty, we have 
eighteen periods, and if you were buying regularly you could make 
two per cent on each of those eighteen periods by anticipating the regu- 
lar terms of the seller by twenty days. 


Where can you—or we in our purchases—make money faster? And 
why is not the cash discount fair—even though it involves a severe 
penalty on the seller? It should insure a rapid turnover of money! 


The strongest lever that can be used in handling this vexing 
problem of the customer who takes an unearned discount is an 
appeal to his love of the square deal in business, so deep rooted 
in Anglo Saxon peoples. Take the position that to allow a dis- 
count when it is past due, would be on a par with breaking your 
rule about doing a one-price business. You could not do for one, 
what you would not be willing to do for all, and no fair-minded 
customer would ask you to do that. 


This reasoning will not only impress upon a customer your 
one-price policy, but will present the matter to him as a prin- 
ciple rather than as a favor. One sales manager tells the cus- 
tomer that if he just wants a present, to pay the bill and he will 
send him a box of cigars gladly, which cost far more than the 
amount involved. He would do it as an evidence of appreciation 
for the man’s business. But he simply could not cut his price 
or break his terms, and he is sure that the customer would do 
the same thing if the positions were reversed. 


10 


Survey and Study of Competitive Trade Practices 
in 239 Different Lines of Business 


DISCOUNTS AND TERMS OF SALE 


SECTION V 


IV—The Use and Abuse of Trade Discounts 


A form of discount which has been under fire of late, is the 
use of variable discounts for different types of distributors or 
agents. Thus a jobber is given a margin of ten or fifteen per 
cent over the dealer, and a broker may be given a margin of 
five per cent over the jobber. In the automotive line it is quite 
common to allow garages special discounts. This practice has 
been attacked by the fair trade commission, but the courts have 
not sustained the commission, holding that a maker had the 
right to pay his distributors on the basis of service rendered if 
they wished to. A decision involving this principle is a part of 
this survey. 


Loose Granting of Discounts Dangerous: ‘The trade dis- 
count is in theory excellent, provided the discount is actually 
given for service rendered. Unfortunately this is not always 
the case, and we found that there was an all too general practice 
among those receiving trade discounts (especially when there 
was an additional quantity discount given) to give favored cus- 
tomers the benefit of the trade discount on their purchases. This 
practice is particularly evident in the radio business, where so- 
called “dealer’s discounts” are given to anyone who has the fore- 
thought to apply first for dealer’s discount. No standards for 
determining what constitutes a dealer have been laid down. 


Another example of the abuse of trade discounts is the grant- 


_ing of an agency commission by publishers to persons who style 


themselves “advertising agents.” While many publishing 
houses, notably those who are members of the Periodical Pub- 
lishers’ Association, the American Newspaper Publishers’ Asso- 
ciation and the Associated Business Papers are reluctant to 
grant the agent’s commission to any advertising concern which 
is not first approved by the publisher’s committee, there are 
only too many who will give the discount to anyone who can 
convince the publisher that unless he “comes across” he won't 
get the business. 


The same thing holds true in every other line of business 
where trade discounts are the rule. There are some concerns 
in the line who are strong enough to hold out against the de- 
mands of illegitimate dealers and jobbers for trade discounts. 


11 


Survey and Study of Competitive Trade Practices 
in 239 Different Lines of Business 


SECTION V DISCOUNTS AND TERMS OF SALE 


But there are a great many, far too many, who have not the 
necessary moral courage, and who, rather than lose business, 
will recognize the customer’s claim. There are thousands of 
dealers getting “jobbing” discounts when they have no right 
whatever to such discounts. There are thousands of concerns 
who are getting “dealers” discounts on, let us say, typewriters, 
when they are no more typewriter dealers than The Dartnell 
Corporation. There are thousands of buying syndicates getting 
brokers’ discounts, when the orders they are placing are in 
reality the orders of individual dealers. 


It is idle to say that such practices should be stopped, because 
the concerns who are granting such discounts know only too 
well that it is poor business; but they take refuge behind that 
hoary old alibi, that if they don’t, one of their competitors will. 
Few of them seem to appreciate the far-reaching effects that the 
abuse of the trade discount has on an industry. 


How Illegitimate Discounts Hurt An Industry: It cannot be 
too emphatically stated that the aim of all discount granting 
should be the upbuilding of your channels of distribution. We 
find altogether too much of a tendency to regard the use of dis- 
counts as a way of getting bigger orders, shutting out competi- 
tion, meeting competition, or other similar transitory benefits. 
Men forget that they are going to be in business for many years 
to come, and in their anxiety to make a few dollars this year, 
they toss away hundreds of thousands of future dollars. Through 
the trade discount the seller has his greatest opportunity to 
strengthen and build up his avenues of distribution. He can use 
it to eliminate the fly-by-nights and the price cutters, the 
barnacles and the vultures, and he can use it to strengthen and 
develop those in the trade who are worthy of support and co- 
operation. 


To make this point clear I will take the case of the advertis- 
ing agent and the publisher, referred to before. There are listed 
in the National Advertising Directories some 800 self-styled ad- 
vertising agents. Of these 134 are members of the American 
Association of Advertising Agents, an organization which is 
doing highly effective work in elevating the standards of agency 


12 


é j 


Survey and Study of Competitive Trade Practices 
in 239 Different Lines of Business 


SECTION V DISCOUNTS AND TERMS OF SALE 
practice. Before an agency can become a member of this asso- 
ciation, it must subscribe to certain standards of practice. These 
preclude secret rebating, stock ownership in publications in 
which they are placing advertising and numerous other require- 
ments. There are outside of this association possibly fifty or 
sixty, Or more, agencies with sufficiently high standards to be 
eligible to membership if they elected to join. The remaining 
six hundred agencies have not the qualifications necessary. Yet 
out of that six hundred, three hundred and fifty of them are 
approved by the various publisher bodies as being entitled to a 
trade or agent’s discount! 


So we have the peculiar situation of the publishers, who stand 
to gain the most, discouraging higher standards of agency prac- 
tice, by granting discounts to almost anyone who can assure 
them that they can pay their bills! Instead of the publisher 
insisting that the agencies clean up and trade up, they wink at 
inefficiency, and give them the same support that the efficient 
agent receives. Yet any publisher will tell you that the whole 
future of his business is dependent upon the efficient handling of 
an advertising campaign by the agency. 


But the publishers are no better or no worse than hundreds 
others. Very few business men seem to have the necessary cour- 
age to take a positive stand when it comes to withholding a 
trade discount from an unqualified distributor. They ail say: 
that is something for the trade association to work out, and let it 


. goat that! Ten years from now these same men will pay dearly 


for their lack of backbone. 


V—Installment Selling 


The growth of installment selling, especially in the automo- 
bile and home appliance field, in the last decade has forced this 
method of marketing into the limelight. Bankers and economists 
all unite in stating that if the growth of this practice is not 
checked evil consequences are sure to follow. 


While we find instances of where the use of an installment 
plan has served effectively as a means of combating competi- 
tion, most of those interviewed admitted that it was a method 
of selling which should never be used except under the direst 


13 


Survey and Study of Competitive Trade Practices 
in 239 Different Lines of Business 


SECTION V 


necessity. Nearly all who had any volume of installment busi- 
ness on the books report that the losses from uncollectible ac- 
counts are very heavy, and that the business is a nuisance. We 
find many concerns are putting a premium on installment sales, 
increasing both the price to the purchaser, and cutting down the 
commission to the salesman. In this connection the following 
report from a large manufacturer of fire extinguishers is typical: 


We have found that Installment Selling has helped our poor sales- 
men very much. The high-class man doesn’t monkey much with the in- 
stallments after they are selling fire extinguishers. We have purposely 
increased the price on our extinguishers $1.00 when sold on the install- 
ment—and cut the salesman’'s commission. Therefore, the high-class man 
doesn’t take advantage of it, while the weak sister finds that it is very 
much to his advantage to get started by selling on the installment. He 
only has to collect $1.00 down and the balance C. O. D., so it is com- 
paratively easy for him to get the order. We also find that the install- 
ment selling helps us a great deal in selling to homes and automobile 
owners—this is a big class of customers who had previously never been 
worked with any reliable extinguisher. We find that about twenty per 
cent of these accounts are delinquent at all times, but the charge of the 
extra dollar and cutting the salesman’s commission more than takes the 
place of the additional expense involved in following up the collections 
and in losing a certain percentage of the accounts. 


Influence of Employment on Installment Sales: Roger 
Babson estimates that $2,000,000,000 worth of automobile sales 
made last year will be paid for out of 1924 earnings. (This is 
probably $500,000,000 too high.) As this is written radio sets 
by the tens of thousands are being sold on the partial payment 
plan. Retail dealers, to meet the competition of door-to-door 
salesmen, are selling household appliances, musical instruments, 
and furniture in steadily growing volume on installments. Even 
concerns who do not believe in this plan of selling and who 
recognize the danger, are forced by competition to adopt the 
practice. Jt has become epidemic. 


While employment continues good, as at present, no difficulty 
will be experienced by these concerns. But employment will not 
continue good indefinitely. It never has. It never will. A 
glance at employment figures over a period of twenty years will 


14 a 


c 


ra 


Survey and Study of Competitive Trade Practices 


SECTION V 


show that it is very much of a feast or famine proposition, and 
any concern selling on installments should watch this curve 
carefully. 


Lines of Business Using Installment Sales: In an endeavor 
to determine the extent to which installment selling is growing, 
a Washington economist checked the advertising in twenty- 
seven newspapers from November 11th to December 20th. He 
found that these papers published 141 advertisements which 
made a direct appeal for time payment sales on the following 
products: 


Furniture Radio Equipment 
Pianos Violins 

Used Cars Cedar Chests 
Clothing Silverware 
Washing Machines Kitchen Cabinets 
Stoves New Automobiles 
Rugs and Carpets Typewriters 
Jewelry Diamonds 
Phonographs Vacuum Cleaners 
Sewing Machines Lamps 

Women’s Apparel Candy and Nuts 
House Furnishings Gifts 

Safes Trucks 


Effect of Installment Selling on Sales: Just recently the Na- 
tional Lumber Manufacturers’ Association launched an aggres- 
sive campaign to get lumber dealers to sell lumber on part time 
payments to house builders. Other associations have in the past 
encouraged their members to increase sales by lengthening 
terms. Of late a reaction has set in, and many associations who 
formerly were indifferent on this point, are now quite active in 
discouraging retailers from getting involved in the installment 
business. The action of the Retail Clothiers and Furnishers is 
a case in point. Fear is expressed that a continued growth of 
retail installment selling will encourage the building up of a 
business on the basis of terms, rather than quality of merchan- 
dise; that it will tie up unnecessarily too much of a dealer’s 
capital, for even though he can get some one to buy his paper a 


15 


Survey and Study of Competitive Trade Practices 
in 239 Different Lines of Business 


DISCOUNTS AND TERMS OF SALE 


SECTION V 
certain percentage of it will eventually be charged back against 
him. This will deplete his working capital, and cut his capital 
turnover, 


Summing up, the growth of installment selling has reached 
alarming proportions. Every effort should be made by trade 
associations, bankers and others who influence the trade prac- 
tices of their industry to keep this method of selling down to the 
minimum, Dealers should be discouraged whenever possible 
from selling on installments. It is simply a process of mortgag- 
ing the future for the sake of present sales. 


16 


« 


FILE: SECTION V—COMPETITIVE TRADE PRACTICES. 


ANALYSIS OF PRACTICES IN 
MAJOR LINES OF BUSINESS 


Cash, Trade and Quantity Discounts 


Based on Replies to 1000 Questionnaires to 
Subscribers of “Sales Management” Magazine 


INDUSTRY 


eport- 


Ik 


Auto Accessories 
BisctttMigns, /jprore cr Vleet de a: 
Bontls 93 203 io) Sea eke aa ke 
Brushes & Cleaning Supplies. . 
Building “Materialia au he mc suer ee 
Casket Hdw. & Funeral Supplies... 
Glocks' &Jewelryaiici oes 


Cha Me" ene KeF Bote 1S ese 'e 2 Twigic Verte wage ONS (oe Real te, 6 se nanete 


Gutlery;c Sporting Goodsaia cee 
DDIVEGOO00S:. fics eee en ee 
Electrical Supplies & Specialties..... 


PROlasIVvesiic ocd oe ts ener cnetncn tn 
Furnaces & Heaters... 


Cora Noee VISLING ty ens wee eee te ates 
Grocerset VW hiset ieee se 
Hardware: |obberern cc te vee ae 
HardlwarexMitowaca nite re uae 


Household Apphances.73. oy. 522: 


Importers 
AE ORL Saat OCI ES carte tens ens ne eas ere et 


S. AEy. yw YO” eee ce LS. BY ep Ieal® ie pimqvey ye 1 e018) Bi slows 


Form Letter Service 
Machinery & Mill Supplies 


w Ue eee a 


Office Appliances & Equipment 
Paints & Varnishes 
Paper Products 
Printers & Lithographers... 7-622. 
Printing Inks & Supplies 
PRILISHELS A ieuie s siGes oul ial ne a ete 
School Supplies & Furniture 
Seeds & Fertilizers. . 

Shipping Cartons & Containers. 
NSCS CPREL, yh I eee ie face ite Geen (oe 


Pani iem ee ee mC Oe Ce ee ee 
Gita 0 es Ve wlan) (eke Taye 
ova se) teh) Pe oe ow 


Shoe POMSRES E>... sey aoc macnn een oe, 
Soaps; Poweers tC. cam ion 2, ee 
Soda Fountain Equipment—Supplies 
Wearing Apparel 


© at Be Bike we es Ole ee 2 OP Pe ee se 


Totals 


bo — 
N W bo DOIN HA W © & NO WG bo 


—_ 


pb 


— —_ 
QE PODS ONMWWAD ON W bd bo 


bo 


NN > 


Customary Cash Discount Practice 


TRADE 


No. of 


Discounts 


QUANTITY 


None 


142% 10 days—'4 1% 10 days. . 
LOR Tl Orcas wee ea: ee ae 


NoCash: Discount. ).7 ee ean eee 


2% 10 days 
75% allow 2% 10 days— 25% none. 
5%—30 days 
50% allow cash discount 
None 
50% allow 2% 10 days—50% allow 

19.10 daysany.. aioe see oni) 


er ee len eiy a. Oh orem Rel Ate. ie, Mae.) Gea e if ren) (ee mL e, 


oy, ey tee” it, Retell es alse! Levies BP 8) 6) eS) le Lee 


ao) ive) Me™ fe cane Nene. Oe 


lo bie. a Ve biet ee) ©) .6))m) Bw) Biwel\e| SCAe ae) One Ol hin et le wrenen (6. 0) 0/0k hve ais ee Le ae Me rae, 


Allow cash: discount. (cow en Pa aR | Gsk APY Ne 


Allow cash discount 
50% allow 1% and 2% on certain 
items, and 50% allow 2% and 5%. 


ihe. ede hme) ie! e, Meliie Seu) wire ha yen bal ene) 10 ine aes. anos 


NOT eR eo Rey eeiek Site hate tt Means eae ea 


All allow cash discount—40% allow 
296s TO days aac Serie Wak nein enean 
None allowed 
All allow cash discount 
‘Allowscash discountocw anne eee 
6 allow 2% 10 days and 3 allow 5% 
10 days 
All allow cash discount—6 allow 2% 
—10;3 allow 1%—10; 3 allow 5G 
1% 10 days 
27 allow cash discount—2% 10 days 
ISICUSTOMALY sui tee eae ee 
None allowed 
27 allow cash discount, 6 do not; 
75% allow 29:10 daysa.us. 
Do not allow cash discount 
75% allow cash discount, 25% do not 


ei[ e Neetrey a ethhe |e tress) co!) halite te” ella el" enoe my ehee amare en ars 


oa hie) fee ahah ge) ewe et fe, 6) eva sel heer es ye. 26 


CWC ay ete ek yt Me em ey Wn Ce et ae Ae BA SPM WE URC Si rer 


whe: G6) at Selmiaye 6%) @) 6) SOuht hoe) pi tetmelem nS: 


v. let eo!) wire) “ote e. ¢) oie Se, Cease Pees he Fe ie. Kio) nets eee e ns lees 


Ooh. exo) otipe ie", “en elie, ennesie |e? 


en am ere we, 


Allow cashidiscount: 3. 000 YS ee 


50% allow 2% 10 days—50% do not 

allow cash) discount; a... 
75% do not allow cash disc., 25% do. 
Allallowediscounten. uo. oe 
None allowed—discontinued 
25% allow cash discount, 75% do not 
Allallowicash-discountun, sca 
75% allow cash discount, 25% do not 
75% allow cash discount, 25% do not 
All allow 5% cash discount 
Alballow cash:disconnti iis ose 
All allow cash discount—2%—10 
Edays) NetigOng Wey Mas eet oat oe cam 
All allow cash discount—2%—10 

davs netys0 pies Were en ae ene ae 
All allow cash discount—2% 10 days 


So O78), O. 0) 16) 0 


©; 9. Ne fay lal erem 


IA Sa Sat a Ta ea OIF Ht Wc 0 ea we deat 


C/o pete eee? ee 


avs’ s! <9, \0.-Be ve 


Atlow:cash GisCounteuc eee cele tees 


50% allow 2% 10 days—50% do not 
allow "any ei Deuce a a dtenenne te eee 


© J.C. Aspley, 1924 


e 0) 6 te, Valle lett e eile fe: Ye, a 1mae ooo te eee ye aw 


URAC KO 


6) 6a re) meee 


we Ye HG ee aiife ‘elpieie\\o tele 


a rr cr RR A | EE Re Ae | CRON FTES | | emcee ern An ptt 
ee ae 


Section V—Competitive Trade Practices 


Full Text of Mennen Decision 


Reversing Federal Trade Commission’s Ruling That 
Quantity Discounts May Be Granted to All 
Buyers Regardless of Service Rendered 


UNITED STATES CIRCUIT COURT OF APPEALS FOR 
THE SECOND CIRCUIT 


The Mennen Company, 


Petitioner, 
against ss. 
Federal Trade Commission, 
Respondent. 


Before 
Rogers, Manton and Mayer, 
Circuit Judges, 
For Petitioner, 


Gilbert H. Montague, 
Joseph W. Goodwin, 
Charles Furnald Smith. 


W. H. Fuller, 
Chief Counsel, Federal Trade Commission, 


W. T. Kelley, 
Attorney for Respondent. 

Felix H. Levy, 
For Wholesale Dry Goods Assn., National Hardware Assn., 
National Supply & Machinery Dealers’ Assn., National Whole- 
sale Jewelers’ Assn., National Floor Covering Assn., and 
American Brush Manufacturers’ Assn., as Amici Curiae. 


This cause comes here on Petition to Review an order made on 
March 3, 1922, by the Federal Trade Commission. 


The petitioner is a corporation organized under the laws of the 
State of New York, with its principal office and place of business 
in the City of Newark in the State of New Jersey. It is engaged 
in the business of manufacturing and selling talcum powder, tooth 
paste, shaving soap, and various other toilet articles, causing the 
same to be transported to purchasers thereof from the State of 
New Jersey into various other States of the United States and 
foreign countries in direct competition with other persons and 
corporations similarly engaged. It is hereinafter referred to as 
the respondent. 

The Federal Trade Commission on April 15, 1920, filed a com- 
plaint against the respondent and subsequently an amended com- 
plaint on January 27, 1921. It alleged that respondent had adopted 


a plan for the allowance of trade discounts in the marketing of 
its products; that in pursuance of such plan respondent has and 
continues to classify its customers into two groups according to a 
basis of selection adopted by it and has allowed and does allow 
to purchasers of the same quantity and quality of its products, 
different discount ‘rates according to the classification of such 
purchasers by respondent. It is further alleged that this practice 
of varying discounts, irrespective of quantity and quality, tends 
unduly to hinder competition between distributors of respondent’s 
products to retailers or directly to the consuming public. It is 
also alleged that by reason of the facts recited, the respondent 
is using an unfair method of competition in commerce, within the 
intent and meaning of Section 5 of an Act of Congress entitled, 
“An Act to create a Federal Trade Commission, to define its 
powers and duties, and for other purposes,’ approved September 
26, 1914. 


It further alleged that the varying discount rates allowed by 
the respondent are a discrimination in price between purchasers 
of respondent’s commodities for use, consumption or resale within 
the United States and the District of Columbia, the effect of which 
may be to substantially lessen competition in the distribution of 
respondent’s products or between distributors thereof. 


It is further alleged that such discrimination is not founded in 
differences in the grade, quality or quantity of the commodity 
sold and does not make only due allowance for difference in the 
cost of selling or transportation and is not made in good faith to 
meet competition; that the plan for classification of customers 
and the allowance of varying discount rates is not a selection of 
customers in bona fide transactions not in restraint of trade. 


It is also alleged that the actions and doings of the said res- 
pondent referred to and recited are contrary to the intent and 
meaning of Section 2 of an Act of Congress, entitled, “An Act 
to supplement existing laws against unlawful restraints and 
monopolies, and for other purposes,’ approved October 15, 1914. 


The respondent filed an answer denying the jurisdiction of the 
Commission. It also denied the material allegations of the 
amended complaint and asked that it be dismissed. The motion to 
dismiss was overruled and denied. 


Hearings were had and evidence was introduced, before an 
Examiner of the Commission, in support of the allegations of the 
amended complaint and on behalf of the respondent. ‘Then the 
proceeding came on for final hearing and the Commission having 
heard argument and considered the record made its findings as 
to the facts and its conclusion. Its conclusion was that the prac- 
tices of respondent amounted to unfair methods of competition in 
interstate commerce and a violation :of the Acts of Congress 
hereinbefore mentioned. And an order to cease and desist was 
entered. 


ROGERS, Circuit Judge: The transactions complained of are 
transactions in interstate commerce and the acts with which the 
respondent is charged are done in the course of such commerce. 
The practices in which the respondent is engaged as charged in 


the complaint are admitted by it in its answer, but it denies that 
those practices tend unduly to hinder competition, or that they 
constitute an unfair method of competition in commerce, or amount 
to a restraint of trade. 


Two Acts of Congress are herein involved. The Federal Trade 
Commission Act, being the Act of September 26, 1914, 38 Stat. 
717, 724, which provides in Section 5 “That unfair methods of 
competition in commerce (i.e., interstate commerce) are hereby 
declared unlawful,” and the Clayton Act, being the Act of Octo- 
ber 15, 1914, which was passed to supplement existing laws against 
unlawful restraints and monopolies, 38 Stat. 730, provides in 
Section 2 as follows: 


That it shall be unlawful for any person engaged in commerce, in the 
course of such commerce, either directly or indirectly to discriminate in 
price between different purchasers of commodities, which commodities are 
sold for use, consumption, or resale within the United States or any ter- 
ritory thereof or the District of Columbia or any insular possession or 
other place under the jurisdiction of the United States, where the effect of 
such discrimination may be to substantially lessen competition or tend to 
create a monopoly in any line of commerce: Provided, That nothing 
herein contained shall prevent discrimination in price between purchasers 
of commodities on account of differences in the grade, quality, or quantity 
of the commodity sold, or that makes only due allowance for difference in 
the cost of selling or transportation, or discrimination in price in the same 
or different communities made in good faith to meet competition. And 
provided further, That nothing herein contained shall prevent persons en- 
gaged in selling goods, wares, or merchandise in commerce from selecting 
their own customers in bona fide transactions and not in restraint of trade. 


The Section of the Clayton Act provides in substance that it 
shall be unlawful for any person engaged in interstate or foreign 
commerce to discriminate in price between different purchasers 
of commodities in transactions within the United States or under 
its jurisdiction “where the effect of such discrimination may be 
to substantially lessen competition or tend to create a monopoly 
in any line of commerce.” 


Before considering the provision of Section 2 of the Clayton 
Act we find it necessary to consider the Federal Trade Commis- 
sion Act which lies at the basis of this entire proceeding. 


The Federal Trade Commission Act having declared that “un- 
fair methods of competition in commerce” are unlawful, and cre- 
ated a Federal Trade Commission empowered and directed it to 
prevent persons, partnerships, or corporations except banks, and 
common carriers subject to the Acts to regulate commerce, “from 
using unfair methods of competition in commerce.’ And unless 
a person, partnership, or corporation is engaged in using “unfair 
methods of competition” the Commission has no authority what- 
ever to proceed under the Act. 


We are, therefore, confronted with the question as to what is 
meant by the words “unfair methods of competition in commerce” 
as used in the Act. That question was before the Supreme Court 
in 1919 in Federal Trade Commission v. Gratz, 253 U. S. 421. 
That case went up from this court, 258 Fed. 314, and afhrmed the 
conclusion at which we arrived. ‘The defendants were partners 
and were engaged in selling ties and bagging for cotton bales. 
They sold principally to jobbers and dealers who resold the same. 
to retailers, cotton ginners and farmers. For more than a year 


they had refused to sell any such ties unless the prospective pur- 
chasers would also buy from them the bagging to be used with 
the number of ties proposed to be bought. This was held plainly 
insufficient to show an unfair method of competition. In the 
opinion, which was written by Mr. Justice McReynolds, the court 
said: 

The words “unfair methods of competition’’ are not defined by the 
statute and their exact meaning is in dispute. It is for the courts, not the 
commission, ultimately to determine as matter of law what they include. 
They are clearly inapplicable to practices never heretofore regarded as op- 
posed to good morals because characterized by deception, bad faith, fraud 
or oppression, or as against public policy because of their dangerous ten- 
deney unduly to hinder competition or create monopoly. The act was 
certainly not intended to fetter free and fair competition as commonly 
understood and practiced by honorable opponents in trade. .. . 


The complaint contains no intimation that Warren, Jones & Gratz 
did not properly obtain their ties and bagging as merchants usually do; 
the amount controlled by them is not stated; nor is it alleged that they 
held a monopoly of either ties or bagging or had ability, purpose or in- 
tent to acquire one. So far as appears, acting independently, they under- 
took to sell their lawfully acquired property in the ordinary course, with- 
out deception, misrepresentation, or oppression, and at fair prices, to pur- 
chasers willing to take it upon terms openly announced. 

In this case, as in the Gratz case, the complaint contains no 
intimation that the Mennen Company has any monopoly of the 
business of manufacturing and selling toilet articles, or that it 
has the ability or intent to acquire one. So far as appears the 
Mennen Company, acting independently, has undertaken to sell its 
own products in the ordinary course, without deception, misrepre- 
sentation, or oppression, and at fair prices, to purchasers willing 
to take them upon terms openly announced. 


In this case, as in the Gratz case, nothing is alleged which 
would justify the conclusion that the public suffered injury or 
that competitors had reasonable ground for complaint. The 
allegation that its practice of varying discounts tended unduly 
to hinder competition between distributors of respondent’s products 
to retailers or directly to the consuming public is a pleader’s 
conclusion. The acts complained of in this case are not those 
which have heretofore been regarded as “opposed to good morals 
because characterized by deception, bad faith, fraud or oppression, 
or as against public policy because of their dangerous tendency 
unduly to hinder competition or create monopoly.” And as said 
in the Gratz case “If real competition is to continue the right of 
the individual to exercise reasonable discretion in respect of his 
own business methods must be preserved.” 


The Clayton bill, as originally introduced, did not contain the 
words “where the effect of such discrimination may be to sub- 
stantially lessen competition or tend to create a monopoly in any 
line of commerce,’ now found in Section 2, but contained the 
words “with the purpose or intent thereby to destroy or wrong- 
fully injure the business of a competitor, of either such pur- 
chaser or seller.” 


The record filed in this court shows no contention by the Com- 
mission that the practices complained of have lessened competi- 
tion as between the Mennen Company and its competitors, but it 
shows at the most that the practices have decreased competition 
among the Mennen Company’s customers, or those desiring to 


« 


YY 


become such. And it is said that if the phraseology above quoted 
as originally contained in the bill had been retained therein upon 
final passage instead of the phraseology, likewise above quoted, 
which was substituted therefor, there might be just ground for 
the claim that the Clayton Act prescribes practices which injure 
competition among the customers of the manufacturer, and not 
merely competition between such manufacturer and his competi- 
tors. But the elimination of the phraseology contained in the bill 
as originally reported and the substitution therefor of the phrase- 
ology in the form in which the bill was finally enacted strongly 
indicates that Congress did not have in contemplation the former 
character of competition but only the latter. 


In the phraseology of the bill as originally reported the inten- 
tion was unmistakably expressed that it was intended to protect by 
its prohibitions both kinds of competition, competition between the 
manufacturer and his competitors, as well as competition between 
the customers of the manufacturer. The act as reported pro- 
hibited acts “with the purpose or intent to thereby destroy or 
wrongfully injure the business of a competitor, of either such pur- 
chaser or seller.” 


We have recently had occasion to point out that in the case of 
an ambiguous or obscure Statute the intent of Congress may be 
gathered from statements in reports of committees having the leg- 
islation in charge in either House of Congress. U. S. ex rel Fazio 
v. Tod, decided Nov. 13, 1922. And statements made on the floor 
of either House by the committee in charge of the bill in the 
course of its passage may in like manner be considered. See 
Duplex Printing Press Co. v. Deering, 254 U. S. 443, 475. 


It is a matter of common knowledge that prior to the enactment 
of the Clayton Act a practice had prevailed among large corpora- 
tions of lowering the prices asked for their products in a particular 
locality in which their competitors were operating for the pur- 
pose of driving a rival out of business. Such lowering of prices 
was maintained within the particular locality while the normal or 
higher prices were maintained in the rest of the country; and this 
practice was continued until the smaller rival was driven out of 
business, whereupon the prices in that locality would be put back 
to the normal level maintained in the rest of the country. The 
Clayton Act was aimed at that evil. This appears from the Report 
of the Judiciary Committee of the House of Representatives from 
which we quote as follows: 

Section 2 of the bill is intended to prevent unfair discrimination. It is 
expressly designed with the view of correcting and forbidding a common 
and widespread unfair trade practice whereby certain great corporations 
and also certain smaller concerns which seek to secure a monopoly in 
trade and commerce by aping the methods of the great corporations, have 
heretofore endeavored to destroy competition and render unprofitable the 
business of competitors by selling their goods, wares, and merchandise at 


a less price in the particular communities where their rivals are engaged 
in business than at other places throughout the country. .. . 


The necessity for legislation to prevent unfair discriminations in 
prices with a view of destroying competition needs little argument to sus- 
tain the wisdom of it. In the past it has been a most common practice 
of great and powerful combinations engaged in commerce—notably the 
Standard Oil Co., The American Tobacco Co., and others of less notoriety, 
but of great influence—to lower prices of their commodities, oftentimes 
below the cost of production in certain communities and sections where 


they had competition, with the intent to destroy and make unprofitahle 
the business of their competitors, and with the ultimate purpose in view of 
thereby acquiring a monopoly in the particular locality or section in which 
the discriminating price is made. .. . 


In seeking to enact Section 2 into law we are not dealing with an 
imaginary evil or against ancient practices long since abandoned, but are 
attempting to deal with a real, existing, widespread, unfair and unjust 
trade practice that ought at once to be prohibited in so far as it is within 
the power of Congress to deal with the subject. 


There is nothing in the Report of the Committee which shows 
that in reporting the bill the Committee had in mind anything 
more than the suppression of the evil above referred to. 


This substitution in the final stages of the Clayton bill of the 
clause to which we have referred plainly indicates the intent of 
Congress to exclude from the operation of the section mere com- 
petition among “purchasers” from the “seller” or “person” who 
allowed or withheld the discount and to include therein only com- 
petition between such “seller” or “person” and the latter’s own 
competitors. It was the latter class of competition and not the 
former which had been “the common practice of great and power- 
ful combinations engaged in commerce” to which the Committee in 
its report referred. And there is nothing in the report of the 
Judiciary Committee, of either House, or in anything said on the 
floor of either House by those in charge of the bill which indicates 
or suggests any such interpretation which the Commission in this 
case has placed upon the Act. 


What the Mennen Company has done, was to allow to “whole- 
salers” who purchased a fixed quantity of their products a certain 
rate of discounts while to the “retailers” who purchased the same 
quantities it denied the discount rates allowed to the ‘“‘wholesalers.” 
This does not indicate any purpose on the part of the Mennen Com- 
pany to create or maintain a monopoly. The company is engaged 
in an entirely private business and it has a right freely to exercise 
its own independent discretion as to whether it will sell to “whole- 
salers” only or whether it will sell to both “wholesalers” and 
“retailers,” and if it decides to sell to both it has a right to deter- 
mine whether or not it will sell to the “retailers” on the same terms 
it sells to the “wholesalers.” It may announce in advance the cir- 
cumstances, that is the terms, under which it will sell or refuse to 
sell. In United States v. Colgate & Co., 250 U. S. 300, 307, the 
Supreme Court declared that: 

In the absence of any purpose to create or maintain a monopoly, the 
Act does not restrict the long recognized right of trader or manufacturer 
engaged in an entirely private business, freely to exercise his own inde- 
pendent discretion as to parties with whom he will deal. And, of course, 
he may announce in advance the circumstances under which he will refuse 
to sell. ‘‘The trader or manufacturer, on the other hand, carries on an 
entirely private business, and may sell to whom he pleases.” United States 
v. Trans-Miss. Freight Association, 166 U. S. 290, 320. “A retail dealer 
has the unquestioned right to stop dealing with a wholesaler for reasons 


sufficient to himself, and may do so because he thinks such dealer is acting 
unfairly in trying to undermine his trade.’’ 


In the Colgate case the court sustained the right of a manufac- 
turer engaged in a private business to announce in advance the 
prices at which his goods may be resold and his right to refuse to 
deal with wholesalers or retailers who do not conform to such 
prices. As subsequently explained by the court that case was 


Vy 


decided upon the ground that the manufacturer had an undoubted 
right to specify resale prices and to refuse to deal with anyone 
who failed to maintain the same. It did not appear that the Col- 
gate Company had undertaken to enter into any agreements, ex- 
press or implied, which undertook to obligate vendees to observe 
specified resale prices. And in the case now before the court it 
does not appear and is not alleged that the Mennen Company ever 
undertook to fix the prices at which its products were to be resold 
by those who purchased from it. 


In Federal Trade Commission v. Beech-Nut Packing Company, 
257 U.S. 441, the subject was gone into very fully and the Col- 
gate case was explained and the reason for that decision was 
clearly stated and it was made evident that if the Colgate Com- 
pany had undertaken by agreements express or implied to obligate 
those to whom it sold its products to observe specified resale prices 
a different decision would have been rendered. In the Beech-Nut 
case the right to fix the prices at which the manufacturer will sell 
is again fully recognized. But the course which the Beech-Nut 
Company had adopted was condemned because of the method it 
pursued to control the resale prices. The difficulty was that the 
manufacturer had adopted and was enforcing a system of fixing 
and maintaining certain specified standard prices at which its 
products should be resold by purchasers thereof with the purpose 
of eliminating competition in prices among all jobbers engaged in 
handling the products manufactured by the company. And the 
court after reviewing its previous decisions (250 U. S. 300; 252 
U. S. 85; 256 U. S. 208) said: 


By these decisions it is settled that in prosecutions under the Sherman 
Act a trader is not guilty of violating its terms who simply refuses to 
sell to others, and he may withhold his goods from those who will not 
sell them at the prices which he fixes for their resale. He may not, con- 
sistently with the act, go beyond the exercise of this right and by con- 
tracts or combinations, express or implied, unduly hinder or obstruct the 
free and natural flow of commerce in the channels of interstate trade. 


In Sears, Roebuck &@ Co. v. Federal Trade Commission, 258 
Fed. 307, 312, the Circuit Court of Appeals in the Seventh Circuit 
declared in speaking of the Federal Trade Commission Act of 
September 26, 1914, 38 St. 719, c. 311: 


We find in the Statute no intent on the part of Congress, even if it 
has the power, to restrain an owner of property from selling it at any 
price that is acceptable to him or from giving it away. 


And in Great Atlantic & Pacific Tea Co. v. Cream of Wheat 
Co., 227 Fed. 46, 49, we declared in our opinion written by Judge 
Lacombe: 


Before the Sherman Act it was the law that a trader might reject the 
offer of a proposing buyer, for any reason that appealed to him; it might 
be because he did not like the other’s business methods, or because he had 
some personal difference with him, political, racial, or social. That was 
purely his own affair with which nobody else had any concern. Neither the 
Sherman Act, nor any decision of the Supreme Court construing the same, 
nor the Clayton Act, has changed the law in this particular. We have not 
yet reached the stage where the selection of a trader’s customers is made 
for him by the government. 


In accordance with these opinions we have no doubt that the 
Mennen Company had the right to refuse to sell to retailers at all, 
and if it chose to sell to them that it had the right to fix the price 


at which it would sell to them, and that it was under no obligation 
to sell to them at the same price it sold to the wholesalers. It did 
not discriminate as between retailers but sold to all retailers on 
one and the same scale of prices. And it did not discriminate 
as between wholesalers but sold to all wholesalers on one and the 
same scale of prices. ‘There is nothing unfair in declining to sell 
to retailers on the same scale of prices that it sold to wholesalers 
even though the retailers bought or sought to buy the same quantity 
the wholesalers bought. 


In conclusion it ought perhaps to be said that we have not been 
unmindful of the fact that the Mennen Company in classifying 
purchasers into two groups, those of wholesalers and retailers, 
placed in the group of retailers a class of mutual or cooperative 
corporations which purchased in large quantities the Mennen 
products. These mutual or cooperative corporations, it is ad- 
mitted, consist solely of the retailers in the same line of trade, the 
stock being held exclusively by retailers. The fact that these in- 
dividuals, admitted by the counsel for the Federal Trade Com- 
mission to be retailers, see fit for their own convenience to or- 
ganize themselves into a corporation which they constitute their 
agent for purchasing purposes does not change their character, or 
the character of their purchases, and convert them into whole- 
salers. 


Whether a buyer is a wholesaler or not does not depend upon 
the quantity he buys. It is not the character of his buying but 
the character of his selling which marks him as a wholesaler as 
this court pointed out in Great Atlantic @ Pacific Tea Co. ws. 
Cream of Wheat Company, supra. A wholesaler does not sell 
to the ultimate consumer but to a “jobber” or to a “retailer.” 
The persons who constitute these mutual or cooperative concerns 
are buying for themselves to sell to the ultimate consumers, and 
not to other “jobbers” or to other “retailers.” The nature of the 
transaction herein involved is not altered by the fact that they 
make their purchases through the agency of their corporation. 
For some purposes a corporation is distinct from the members 
who compose it. But that distinction is a fiction of the law and 
the courts disregard the fiction whenever the fiction is urged to 
an intent and purpose which is not within its reason and policy. 
And in such a case as this the fiction cannot be invoked. The 
important fact is that the members of the corporations are all 
retailers who buy for themselves to sell to the ultimate consumer. 
The Mennen Company is within its rights in classifying them as 
retailers. 


The facts established by the testimony are not sufficient to 
constitute a violation either of the Federal Trade Commission Act 
or of the Clayton Act, and they do not support the Commission’s 
conclusions of law. The Mennen Company is not shown to have 
practiced “unfair methods of competition in commerce.” 


The order to cease and desist is reversed. 


The opinion was written by Judge Rogers and was concurred 
in by Judges Manton and Mayer. 


SUPPLEMENTARY NOTES 


SUPPLEMENTARY NOTES 


= . 


SECTION SIX 


Premiums and Special 
Inducements 
When, and Under What Conditions, Are Premiums to 


y Dealers’ Clerks, Free Deals and Similar 
y Devices, Justified ? 


SECTION SEVEN 


Pooled Shipments and Split 
Deliveries 


Should Manufacturer Encourage These Kinds of Orders 
») By Quoting Special Discounts on Them? 


Vhs nV: , 


eA aonagide ) 
ye sie ne 


oom 
#S67 o. 


See, 7 SECTION SEVEN 


Pooled Shipments and Split 
Deliveries 


What Can Be Done to Get Buyers to Place Orders of Sufficient 
Size to Return a Profit?—Is Split Delivery Selling 
Justified ?—The Turn-Over Problem 


Copyright, 1924, by J. C. Aspley, Chicago 


quantity discounts and special inducements were generally 

bad practice. The resulting effects were usually over-load- 
ing the customer, “freezing” his working capital, leading to 
price cutting and other undesirable methods of moving the stock. 
It was generally agreed by those we interviewed, that a healthier 
business could be built up by a discount policy that developed 
conservative buying, quick turnovers, and kept the buyer’s capi- 
tal liquid. This viewpoint, we are confident, is shared by most 
business men. 


[: SECTION V of this survey it was shown that the use of 


Yet this, like many other things, can be overdone. And 
there is a great deal of evidence in the present situation to 
indicate that in many lines the practice of placing fractional 
orders is seriously adding to the cost of selling—if indeed it is 
not principally responsible for the growing number of business 
failures, especially in the textile line. 


We have before us now a letter from a manufacturer of 
advertised underwear whose business was built up three years 
ago by selling in small quantities, depending upon national 
advertising to produce the demand needed to stimulate repeat 
business. Seventy per cent of the output of the concern is this 
advertised brand of underwear. 


99 


“As a general rule,” the sales manager of the concern told 
your editor, “our salesmen start out selling underwear about 
October, selling goods for the following spring. These orders 


1 


Survey and Study of Competitive Trade Practices 
in 239 Different Lines of Business 


SECTION SEVEN POOLED SHIPMENTS AND SPLIT DELIVERIES 


are shipped anywhere from January to May. Formerly it was 
only necessary for the salesman to make one trip, but in the past 
year some of our men are compelled to make four trips, in order 
to book their spring business. This means three times the sell- 
ing expense. When merchants do place their orders, they only 
fill in on sizes, depending upon the manufacturer to carry the 
stock for them, so they can order out at their convenience. As 
a consequence we receive each day during the selling season a 
large volume of small orders. Very often a customer will order 
only enough to last him four or five days, and then he will 
reorder. This not only requires a greater handling cost, but 
results in an actual loss of business by the customer being out 
of stock. Our average number of orders has increased five times 
to equal the same volume. Instead of making one shipment, we 
now make five. We are handicapped in anticipating our de- 
mand, cannot buy our raw materials to the best advantage, and 
in other ways are penalized.” 


This case is typical of a great many manufacturers selling 
a product for resale. They are quite alive to the dangers of 
overstocking their customers, and will even admit that the dis- 
tributor should not be expected to carry the manufacturer’s 
stock. But they are faced with a condition, not a theory. Hand- 
to-mouth buying is forcing them into receivership. ‘They can- 
not raise their prices and thus recover the extra money they 
are spending in handling these small orders, or at least they 
think they cannot increase them. They already have production 
costs down to bed rock. Sales costs are down close to the 
danger point. What are they to do? 


segregating the Unprofitable Items or Departments: Your 
investigators found in most cases that the losses which pro- 
ducers and distributors complained of were local. That is to 
say, they did not apply to the whole business, but only to certain 
lines, or certain departments. 


One company which had armed itself with such facts, and 
which was already taking steps to plug the leaks thus reflected, 
was the Western Electric Company. Ten years ago this com- 
pany started an exhaustive investigation to discover why it was 
not making a larger percentage of profit, on the large volume of 


2 


Survey and Study of Competitive Trade Practices 
in 289 Different Lines of Business 


SECTION SEVEN POOLED SHIPMENTS AND SPLIT DELIVERIES 


business it was doing. It found that while it was making money 
on its business as a whole, it was losing money on sixty per cent 
of the orders sent in by its salesmen, simply because they were 
too small. 


The analysis of orders handled by the Western Electric Com- 
pany, is shown on Chart 1 herewith. During the year these 
figures were compiled, the average expense to the Western Elec- 
tric Company in handling an order was $7, and the average 
order was about $56. “A further analysis of the details of this 
expense,” said O. D. Street in a report to the Association of Na- 
tional Advertisers, “showed us that a great many of our expenses 
varied directly with the number of orders handled. For ex- 
ample, such items as the salaries paid order entering clerks, bill 
writing clerks, pricers, editors, accounting clerks, etc. The 
value of the order has nothing to do with these costs. 
The money value represented by these costs amounted to fifty 
cents per order, an amount which represents fifty per cent ona 
dollar order but only one per cent on a fifty dollar order. 


CHART No. 1—Analysis of Orders Handled 


+ m2 2 Ss 7 SEE eS 

Sees aie pa ult of 7 a Wed: 

he palma are ipa > ile - Sa, AY Ste 

g6 Lee On —@ ae eo x Sn Om a ZnO 

Sg 838 is Be am Rect Sos c23 28 88 38; 

ee aes os raG aS >a G Ere oo £8 S>xuo 

FO ZOH AH ie Ay 6) qo PY OAS qU Ay 

Under $5 1936 2505 463,200 1 SAAD $137: 0300 eG. 30n  S O.7 5 

5+ to. 510....108 14 783,000 1.7 al Be Rs AN, PE die Ac, 2.07 

S10 to +925"°...162! 21 2,783:160 2 6 17.18 7257600 33 P26 4,48 
Total above VES poh Tie 

classes ....463 60 $ 4,029,360 8.7 $ 8.70 $1,086,350 12.5 27 $ 2.35 

Over $25....309 40  42,577,800- 91.3 137.80 7,630,200 87.5 18 24.70 


“From this study we found that we could approximate our 
costs for handling the different classes of orders. With these 
figures it was a simple matter to compare this cost with the 
average profit on different sized orders, as in the manner shown 
in Chart II. We thus discovered (1) that contrary to our belief, 
the orders which carried the highest rate of profit were, in 
reality, the ones on which taken as a class we were losing an 
enormous amount of money; (2) we also discovered contrary 


3 


=, 8 


Survey and Study of Competitive Trade Practices 
in 239 Different Lines of Business 


SECTION SEVEN POOLED SHIPMENTS AND SPLIT DELIVERIES 


to our belief that the orders which carried the lowest rate of 
profit, were in reality the ones on which we made all our 
money.” 


CHART No. 2—Relative Profitableness of Orders Handled 


8 Sey elenyes c 
o Ses 0 wg oY o hry o VS Os 

38 gate #e6 #2 ge5 $65 $6 | 

ef: Bove: (Say eels eo eee By E 

he) <Z00 apm aS 40m <A <u HH 
Under SS) aac. Jen 193,000 $ 2.40 30 $0.71 $ 3.25 —$ 2.54 —490,220 
Rete S107 Ae ee 108,000 1.25. 29 V (2.07 1, 3,740 1.67 peas aed 
S10 *toh25. see ee 162,000 17318. 426 4.48 5.00 — .52 — 84,240 
Total above classes.463,000 $ 8.70 27 $2.35 $ 3.98 —$ 1.63 —754,820 
Syer “b25a) see ee 309,000 137.80 18 24.70 14.58 10.12 3,124,500 


When Small Orders Should Be Encouraged 


We urge upon all our subscribers, who are concerned about 
the diminishing profit per order, that they make a similar inves- 
tigation or analysis of their business, as Mr. Street made for the 
Western Electric Company. It is sure to bring to light many 
valuable points. But at the same time it should be pointed out 
that there are circumstances under which small orders are to 
be encouraged, even at the risk of a curtailment in profits. 


Experience of W. L. Douglas Shoe Co.: This is particularly 
true in a drive for securing new distribution for a quick repeat- 
product sold over the retail counter, where the repeat demand 
is stimulated by advertising, or where the product is faced with 
severe brand competition, as for example a soap, or of breakfast 
food. There is also much to be said for the plan in a line where 
there are numerous styles and sizes. 


The W. L. Douglas Shoe Company of Brockton, Mass., for 
example, report very beneficial results from a plan they have for 
selling dealers only enough shoes to take care of their require- 
ments for sixty days. The salesmen, of course, exert every effort 
to get orders for the full line of shoes, but they do not urge 
large stocks. The dealer is then followed up closely by mail 
from the home office for fill-in orders. “As a result,’ writes G. 
B. Hendricks, sales manager for Douglas, “our dealers do not 


4 


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os a e 


Survey and Study of Competitive Trade Practices 
in 239 Different Lines of Business 


SECTION SEVEN POOLED SHIPMENTS AND SPLIT DELIVERIES 


have to guess what styles will sell, what sizes and widths will 
be needed, nor whether they will have money enough to pay 
their bills when they become due. We have been using this 
plan now for eighteen months and during that time we have 
been trying to make the orders smaller instead of larger. It 
works so well that we now have more business, more dealers 
and a healthier lot of retail stores to deal with. The dealers 
do not have large stocks of unsalable merchandise, odd sizes, 
and narrow widths to dispose of via the bargain box.” 


When the Problem Is to Keep Salesmen Out in the Field: 
Another condition which warrants a policy for the encourage- 
ment of small orders is when the country is well covered by a 
large sales organization, fighting entrenched competition which 
covers the trade by a semi-annual sales trip, usually made by 
a home office representative. 


For example, in marketing Van Heusen collars, the Phillips- 
Jones Corporation decided its best chance to break into a 
market, in which long established competitors were securely en- 
trenched, was to use resident salesmen, who were instructed to 
cover their trade once a month. The management felt that by 
requiring the salesmen to take smaller orders, instead of the 
usual seasonable orders, that it would enable the salesmen to 
become more familiar with the needs of their customers and in 
time give them a decided competitive advantage. In this case 
the increased cost of handling a flow of smaller orders was 
justified. 


There are, of course, other circumstances when it is advis- 
able and desirable to encourage small orders, but speaking gen- 
erally the tendency to buy from hand-to-mouth is a severe eco- 
nomic waste, and a big factor in present high sales costs. In 
our opinion, sales executives can well afford to investigate this 
aspect of their sales problem, to determine if possible, (1) what 
departments are suffering through sub-normal orders and (2) 
what steps can be taken to bring these orders back to normal. 
While it is quite impractical, in a work such as this, to prescribe 
any cut and dried plans, we will set down here the methods 
which others have found useful in this connection, and possibly 
you can adapt from them some usefyl plan or method. 


6 


@ 


» 


Survey and Study of Competitive Trade Practices 
in 239 Different Lines of Business 


SECTION SEVEN POOLED SHIPMENTS AND SPLIT DELIVERIES 


II1—Bonus on Monthly Purchases 


A great deal of the so-called hand-to-mouth buying being 
done by merchants is unquestionably due to the tendency of 
spreading business around among a number of manufacturers 
or jobbers. The soap situation is a good illustration of how 
this tendency affects the unit of sale. Your investigators found 
more than sixty-four distinctly different brands of soap 
carried in stock by one Chicago druggist. This druggist stated 
he had to carry this many brands because of popular demand 
created by the advertising of the various manufacturers. Assum- 
ing that this druggist had a sale of 300 boxes of soap a month, 
and that the demand was fairly even for each brand, his sales 
on each brand would run between four and five boxes a month. 
If, on the other hand, he carried only four of the most popular 
brands, his sales might be slightly less on the total number of 
boxes sold, but they would probably amount to at least four 
dozen boxes of each brand a month. 


The National Biscuit Company Plan: In an effort to combat 


this uneconomic situation the National Biscuit Company de- 


veloped some years ago a series of bonus discounts, whereby 
each dealer is given a discount according to the aggregate vol- 
ume of-his monthly purchases. The discounts are as follows: 


No discount if the aggregate monthly purchases amount to 
less than $15, 


Five per cent discount on all purchases if the total amounts 
to $15 or more, but less than $50 in one month. 


Ten per cent discount on all purchases if the total amounts 
to $50 or more, but less than $200 in one month. 


Fifteen per cent discount on all purchases if the total 
amounts to $200 or more in any one month. 


In a hearing before the Federal Trade Commission it was 
stated by Albert B. Bixler, general sales manager of the National 
Biscuit Company, that this policy had played an important point 
in building the sales of that company to a point where it now 
enjoys forty-nine per cent of the total biscuit and cracker busi- 
ness in the country, with sales in excess of $100,000,000 annually. 


7 


Survey and Study of Competitive Trade Practices 
in 239 Different Lines of Business 


SECTION SEVEN POOLED SHIPMENTS AND SPLIT DELIVERIES 


One of the difficulties encountered in the operation of this 
plan, and on which brought both the National Biscuit Company 
and the Loose-Wiles Biscuit Company into conflict with The 
Federal Trade Commission was the matter of withholding this 
discount to buying syndicates. This constituted discrimination 
in price between purchasers operating independent grocery 
stores, and purchasers operating a chain of stores. The full 
text of the Federal Trade Commission’s order to Cease and 
Desist in the case of the Loose-Wiles Biscuit Co. is appended to 
this report as a matter of record. It remains to be seen whether 
the Commission will be sustained in the courts, however. 


A Plan Which Increased One Concern’s Business 500 Per 
Cent: In the same way the necessity under present conditions 
for a jobber to handle an ever increasing number of parallel 
brands is working a hardship on both the producer and the 
distributor. Unless a jobber has a tremendous capital he must 
place only small orders. His salesmen, being more or less 
order takers, seldom push any one or two lines, in cases where 
competitive lines are carried, but takes an order what the dealer 
thinks he wants. As a result of this kind of selling, the total 
volume on one group of items may be quite satisfactory from 
the jobber’s standpoint, but it does not enable the jobber to 
place orders with manufacturers of a size that makes the order 
profitable. In fact, it is likely, in a great many cases, to repre- 
sent a loss. 


In the automotive equipment field this condition is espe- 
cially acute. A recent analysis made by the Automotive Equip- 
ment Association showed that the average turnover of a job- 
ber’s stock in that field was only three. As a result many con- 
cerns are reverting to the exclusive agency plan, whereby they 
sell only one jobber in a territory requiring in return that the 
jobber will handle their product exclusively. This may be in the 
nature of a gentleman’s agreement, or in the nature of a care- 
fully drawn contract, but since it is fair to both parties it is 
morally justified. 


This policy permits of very close cooperation between the 
jobber and the manufacturer. It allows the manufacturer to 
invest money in the training and development of the jobbers’ 
salesmen, because in effect they are his salesmen. As a result, 


8 


Survey and Study of Competitive Trade Practices 
in 239 Different Lines of Business 


SECTION SEVEN POOLED SHIPMENTS AND SPLIT DELIVERIES 


these salesmen, instead of going through their territories, book- 
ing orders that are on the “hook,” make a serious effort to create 
business for the manufacturer where none previously existed. 
All their enthusiasm and energy is concentrated on one product, 
and not spread out over a dozen or more. The volume of busi- 
ness they therefore sell in the group as a whole is almost sure 
to be greater, and all that business will be filled by one manu- 
facturer, and not spread out over a dozen manufacturers. We 
found one concern, the Bastian-Blessing Company of Chicago, 
who attribute a five hundred per cent increase in their business 
during the past two years to their policy of concentrating jobber 
outlets this way. 


I1I—Charging a Premium for Minimum Orders 


Another method in use, and one for which much was claimed, 
is the practice of setting a minimum order figure. On any orders 
for less than that amount a special handling charge is made to 
absorb the loss.. The envelope business is a good example of 
this. Here is a business where a buyer can estimate fairly well 
his future requirements for several months ahead or he can 
just order from month to month. At present there is a decided 
tendency among buyers to only order the envelopes they will 
need at once, thereby causing not only a loss of profit to the 
manufacturer, but an endless stream of “rush” orders through 
the factory. So, to combat this tendency most envelope manu- 
facturers are now setting a minimum quantity which they will 
make up to order. Even on small orders from stock a flat 
charge is made to cover handling. 


The Quaker Oats Company Plan: In the same way we 
found a number of manufacturers who had practically solved this 
vexing problem of unprofitable small orders by establishing a 
differential in price based on pool car delivery. This method, 
of course, is by no means new. It has long been in use in the 
building material field, and the packers have used it almost since 
the invention of the refrigerator car. Yet it is surprising how 
many manufacturers there are who do not appreciate the advan- 
tages of the plan. 


In certain territories the Quaker Oats Company, for example, 
has almost overcome hand-to-mouth buying by the simple 


9 


Survey and Study of Competitive Trade Practices 
im 239 Different Lines of Business 


SECTION SEVEN POOLED SHIPMENTS AND SPLIT DELIVERIES 


expedient of having one selling price based on car delivery, and 
another based on warehouse delivery. In other words, the cus- 
tomer is given the benefit of the saving if he does his own ware- 
housing. In one city, for instance, the jobber is allowed five 
cents per case if he will take delivery of package goods on ar- 
rival of car. The Quaker Oats representative will call on the 
jobbing trade and endeavor to get him to estimate his require- 
ments for a given period. He will then tell the jobber that this 
quantity of merchandise will be ordered and carried by the 
Quaker Oats Company in the local warehouse. He can order it 
out as he needs it, and pay for it as he orders it out, or he can 
take over the goods upon the arrival of the car and save from 
five to ten cents acase. Asa rule he takes the saving, and once 
he has the stock on hand he may be depended upon to move it 
off his floor with the utmost promptness. 


Effect on Competition Among Distributors: It will be 
noticed that the above plan is quite different from the so-called 
“pooled shipment” as it is generally understood. In the Quaker 
Oats plan each customer is buying for his own account, and the 
pooling part of the plan is merely to save transportation. It 
does not involve the quantity discount, nor is it a device by 
which dealers who are not entitled to the quantity discount, earn 
it by pooling their purchases and placing their combined order 
through one dealer, as in syndicate buying. 


Quite regardless of the ultimate outcome of the Federal 
Trade Commission’s attitude on the matter of quantity dis- 
counts, we question whether the policy of allowing special dis- 
counts on branded products, to quantity purchasers, is conducive 
to good business. It certainly encourages price cutting, since a 
merchant who is able to buy a well-known product more advan- 
tageously than a competitor is tempted to use that advantage to 
win trade. It is well established that such price cutting in the 
long run reacts severely against the manufacturer, since those 
dealers who cannot compete in price will eventually discontinue 
stocking it. Thus the manufacturer’s distribution outlets will 
be curtailed and his sales suffer. Further than that it is a well- 
known fact that once the usefulness of the branded product has 
‘been lost to a chain store, as happens when his competitors 


10 


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2 


Survey and Study of Competitive Trade Practices 
in 239 Different Lines of Business 


SECTION SEVEN POOLED SHIPMENTS AND SPLIT DELIVERIES 


discontinue handling it, the chain store or syndicate will lay it 
to one side and bring out his own brand. 


IV—Split Deliveries on Quantity Orders 


The recent lowering of interest rates and the general ease 
of money has encouraged many sellers to meet the fractional 
order situation by arranging to carry the customer’s stock for 
him. These manufacturers argue that since they can borrow 
money more easily and more cheaply than most of their cus- 
tomers, that they can give themselves a decided advantage over 
their competitors by financing his stock. As a result there is 
now evident a general willingness among manufacturers to take 
a large blanket order from a customer, who thus earns the quan- 
tity discount and then ship the goods on the order as he needs 
them, 


Seemingly this plan has much to commend it, but since it is 
in reality an indirect form of price cutting, there is much to be 
said against the practice. In the first place such a policy puts the 
sales emphasis on the discount, and takes it off the quality of » 
the product. Thus the practice breaks down the morale of the 
sales force, at the very time when it should be sustained by 
every possible means. “In the second place the plan does not 
solve the small order problem, but in reality accentuates it. 


Five Gallon Orders At the Fifty Gallon Price: In order to 
visualize the evils of this practice we will cite the case of a 
liquid soap manufacturer who sells his product for $1.25 a gal- 
lon in five gallon orders, and for $1.00 a gallon in fifty gallon 
lots. The reason for the lower price is, of course, the saving 
in packaging and the saving in handling. But your investigator 
found that a very large percentage of the orders being sold by 
the salesmen of this company, called for fifty gallons of lquid 
soap, at the $1.00 price, to be delivered five gallons at a time as 
ordered by the customer! And the firm not only accepted these 
orders, but encouraged them. Both the sales manager and the 
salesmen spoke of them as being “fifty gallon orders.” 


As a matter of fact the salesmen of this company were not 
selling fifty gallon orders at all. They were selling ten five gal- 
lon orders at the fifty gallon price. Each such order represented 


11 


Survey and Study of Competitive Trade Practices 
in 239 Different Lines of Business 


SECTION SEVEN POOLED SHIPMENTS AND SPLIT DELIVERIES 


a considerable loss in profits to the house, and carried with it a 
wonderful opportunity to lose the customer. The sales manager 
defended these orders on the grounds that they shut out com- 
petition. But did they? 


An analysis made of the orders taken by a roofing paper 
manufacturer who sold on split deliveries, showed that twenty 
per cent of all such orders had to be short rated, and that fifty 
per cent of all customers who were short rated dropped off the 
books. In other words, ten per cent of all customers buying on 
split deliveries dropped out every year. Once every ten years 
the entire list of such accounts had to be replaced! This is a 
heavy toll in any business. If the loss were due to poor service, 
or to poor quality of merchandise, there might have been an 
excuse. But it was not due to these reasons. It was almost 
wholly a result of the dislike we all have of paying a short rate 
bill, no matter how justified the seller may be in rendering such 
a bill. It is too much like paying for a dead horse. 


Dangers of Short-Rate on Partial Delivery Orders: While 
this loss might have been abnormally high in the case of this 
roofing paper manufacturer, it is a fact that wherever short rates 
are used (and they must be used on the partial billing plan) 
there is always a heavy turnover of accounts. That is why sc 
many publishers are getting away from the sliding scale of ad- 
vertising rates, and selling space on a “flat” rate. The sliding 
scale, which is exactly the same as selling a given amount of 
goods at a quantity price, and making partial deliveries, neces- 
sitates the publisher charging a short rate on all advertising 
used, should the advertiser, for any reason, be unable to use 
the full amount of space contracted for. As a rule the man 
who cuts down his advertising below what he has contracted to 
use does so because he needs the money. He represents the 
hard-pressed element in a concern’s clientele—the element most 
unlikely to pay a short rate bill—and the element most likely 
to kick the hardest at being asked to pay something they didn’t 
expect to pay when they signed the order. The loss of such a 
customer’s good-will is almost sure to follow. 


After a careful inquiry into the loss of business resulting 
from the use of any sales plan that involves short rating a good 


12 


®) 


Survey and Study of Competitive Trade Practices 
in 239 Different Lines of Business 


SECTION SEVEN POOLED SHIPMENTS AND SPLIT DELIVERIES 


customer, we are of the opinion that it equals, if indeed it does 
not exceed, the gain resulting from securing the customer’s 
signed order for an amount of merchandise at a reduced price, 
which he would probably purchase anyway at the full price. 
In a word, we think it poor business to grant any price conces- 
sion whatever in consideration of a customer’s promise to buy a 
certain volume of business over a period of time, unless you are 


prepared not to enforce payment of short rate bills. 


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SUPPLEMENTARY NOTES 


SUPPLEMENTARY NOTES 


«© 


tion VII—Competitive Trade Practices 


Federal Trade Commission Ruling 
Relating to the Withholding 
of Quantity Discounts 


At a Regular Session of the Federal Trade Com- 
mission, Held At Its Office in the City of 
Washington, D. C., on the 23rd Day 
of January, A. D., 1924 


Huston Thompson, Chairman 
Vernon W. Van Fleet 

Nelson B. Gaskill 

Victor Murdock 

John F, Nugent 


Present: | 


Commissioners 


Federal Trade Commission Docket No. 837 
We 


FINDINGS AS TO THE 
FACTS AND CONCLUSIONS 


versus 


Loose-Wiles Biscuit Company 


Pursuant to the provisions of an Act of Congress approved Sep- 
tember 26, 1914, and an Act of Congress approved October 15, 
1914, the Federal Trade Commission issued and served a com- 
plaint upon the respondent, the Loose-Wiles Biscuit Company, 
charging it with using unfair methods of competition in violation 
of the provisions of sad Act approved September 26, 1914, and in 
violation of the provisions of Section 2 of said Act approved 
October 15, 1914. The respondent having entered its appearance 
and filed its answer herein, hearings were held before John W. 
Addison, an Examiner of the Federal Trade Commission thereto- 
fore duly appointed, at which hearings evidence was introduced 
in support of allegations of the complaint and on behalf of the 
respondent. ‘Thereupon this proceeding came on for final argu- 
ment, and the Commission being fully advised in the premises, 
and upon consideration thereof, makes this its findings as to the 
facts and conclusions: 


FINDINGS AS TO THE FACTS 


PARAGRAPH ONE: ‘The respondent, Loose-Wiles Biscuit 
Company, is now and was at all times hereinafter mentioned, a 
corporation organized, existing and doing business under the laws 
of the State of New York, and through stock ownership in other 
companies controlling nine other plants, located as follows: One, 
each, at St. Louis, Missouri; Omaha, Nebraska; Kansas City, 
Missouri; Dallas, Texas; Chicago, Illinois; Minneapolis, Minne- 
sota, and Chelsea, Massachusetts; and two in Boston, Massa- 
chusetts; and having its central office located in Kansas City, 
Missouri, where most of its officers reside. Respondent owns the 
entire capital stock except qualifying shares, and directs, operates 
and controls the policies of the following corporations: Loose- 
Wiles Biscuit Company of Illinois, Loose-Wiles Biscuit Company 
of Missouri, Loose-Wiles Biscuit Company of Maine, Loose-Wiles 
Biscuit Company of Oklahoma, Loose-Wiles Biscuit Company of 
Tennessee, and Austin Dog Bread and Animal Food Company of 
Massachusetts. 


PARAGRAPH TWO: Respondent is now, and at all times 
hereinafter mentioned has been, directly and through said con- 
trolled companies, engaged in the business of manufacturing and 
selling biscuits, crackers and other bakery products, and causing 
the same to be transported from the States in which the same are 
manufactured to the purchasers thereof in the various other states 
of the United States, the territories thereof, the District of Colum- 
bia and foreign countries, in direct competition with other persons, 
firms, copartnerships and corporations similarly engaged. 


PARAGRAPH THREE: The respondent is the second largest 
single producer of such bakery products in the United States. It 
maintains branches in over 100 cities and controls approximately 
fifteen per cent of such trade in this country. The National Biscuit 
Company of New York, which is the largest single producer of 
biscuits, crackers and other bakery products in the United States, 
has adopted a policy in selling its products to retailers similar to 
the policy of the Loose-Wiles Biscuit Company complained of in 
said complaint herein. The respondent has, for many years last 
past, extensively advertised its products, especially its package 
goods—““Tak-hom-a Biscuits,” “Perfettos’ and ‘“Yum-Yums,” and 
a large number of other varieties, and has created a great demand 
for its products in the United States. 


PARAGRAPH FOUR: The respondent, in the course of its 
business described in Paragraphs One and Two hereof, for more 
than one year last past allowed, and still allows, discounts on the 
aggregate monthly purchases of its products, said discounts vary- 
ing according to the amount of said aggregate monthly purchases; 
for example, aggregate monthly purchases of specified amounts as’ 
indicated below, in addition to a cash discount of one per cent, 


entitled purchasers in New York and Missouri, respectively, to 
discounts as follows: 


Value of 
Purchase New York Missouri 
$ 15.00 5% 5% 
35.00 5% 10% 
50.00 10% 10% 
100.00 10% &24%4% 10% 
150.00 10% & 5% 15% 
200.00 15% 15% 


PARAGRAPH FIVE: The respondent allows to purchasers 
operating more than one retail grocery store, or what are com- 
monly known as “Chain stores” (and will be hereinafter so desig- 
nated) a discount in price on the monthly gross purchases of all 
the separate units or retail grocery stores of such chain store 
systems. ‘The number of separate units or retail stores in the 
various chain store systems vary from two to more than seven 
thousand. The respondent serves each separate unit or retail 
store of a chain system as a distinct and separate purchases—its 
salesmen solicit and take orders from the managers of each of 
the separate units or retail stores; it makes deliveries to each 
separate unit or retail store; in many instances the manager of 
the separate units or retail store pays for respondent’s goods when 
they are delivered, but in other instances payment is made at the 
headquarters of the chain system; in some instances the general 
manager of the chain store system at headquarters to a certain 
extent determines the brands or varieties of respondent’s products 
that the separate units or retail stores of such system will carry— 
that is, the general manager will list the number of brands and 
varieties that each separate unit or retail store will be allowed 
to handle—but the managers of the separate units or retail stores 
then choose any or all of such products on such list that they think 
they can sell in their respective communities, and the quantities to 
be purchased by each separate unit or retail store in all instances 
are determined by the manager of said unit or retail store and 
given to respondent’s salesman when he calls; in some instances, 
however, the manager of the separate unit or retail store deter- 
mines the brands or varieties that his store will handle and has 
complete charge of the ordering of biscuits and crackers from the 
respondent. Different units or retail stores of a chain system in 
many instances handle different brands or varieties of respondent’s 
products. 


PARAGRAPH SIX: There are some very small and likewise 
some very large units or retail grocery stores of chain systems. 
The purchases from respondent of some of the small units or retail 
stores of the chain system amount to less than $15.00 a month, 
while the purchases of some of the large units or retail stores 
amount to several hundred dollars. There are some very small 
and likewise some very large independent retail grocery stores. 
The purchases from respondent of some of the small independent 
retail grocers amount to less than $15.00 a month, while the 


purchases. from some of the large independent retail grocers 
amount to seyeral hundred dollars. 


PARAGRAPH SEVEN: The same salesman, in some instances, 
who takes orders from purchasers operating separate units or 
retail grocery stores of a chain system also takes orders from 
purchasers operating independent retail stores in such salesman’s 
territory, and the same deliveryman who delivers respondent’s 
products to the separate units or retail grocery stores of the chain 
system also makes deliveries of respondent’s products to the inde- 
pendent retail store, in the course of his rounds in his territory. 
In some instances, payments for respondent’s goods are made by 
the purchasers operating separate units or retail grocery stores of 
a chain system in the same way that the payments are made by 
the purchasers operating independent retail groceries. 


PARAGRAPH EIGHT: In many instances a purchaser oper- 
ating a single retail store is in direct competition with a purchaser 
operating a separate unit or retail grocery store of a chain sys- 
tem in selling respondent’s products, and the aggregate monthly 
purchases of respondent’s products by said purchaser operating a 
separate unit or retail grocery store of the chain system are no 
greater than the aggregate monthly purchases of respondent’s 
products by the purchaser operating a single retail store; yet the 
respondent grants a larger discount to the purchaser operating a 
separate unit or retail grocery store of the chain system than it 
does to the purchaser operating a single retail store. 


PARAGRAPH NINE: The respondent sells its products to 
purchasers operating separate units or retail grocery stores of 
grocery chain systems where such separate units or retail stores 
resell a portion of such purchases to other retailers. 


PARAGRAPH TEN: The respondent refuses to sell purchasers 
operating independent retail grocery stores where such indepen- 
dent retail grocery stores resell a portion of such purchases to 
other retailers. 


PARAGRAPH ELEVEN: ‘The cost of selling a purchaser 
operating a separate unit or retail grocery store of a chain system 
is the same as the cost of selling a purchaser operating an inde- 
pendent retail store whose purchases are equal to those of the 
separate unit or retail grocery store of the chain system and 
similarly located. 


PARAGRAPH TWELVE: As the result of the application of 
said system of discounts as aforesaid, a discrimination in price 
is made between purchasers operating retail grocery stores pur- 
chasing similar quantities of respondent’s products. 


PARAGRAPH THIRTEEN: In order to compete with retail 
units of chain store systems in selling Loose-Wiles Biscuit Com- 
pany products, groups of independent retailers in many localities 
in different parts of the United States have attempted to combine 
their purchases and obtain discounts equal to those granted to the 
chain stores: 


a~ 


(a) In some instances one of the independent retailers would buy 
for two or three of his neighbors, placing the order, receiving all de- 
liveries at his store, and paying for the goods, the other grocers in 
the combination calling at his store and getting the goods thus ordered 
and received by him. 


(b) In some instances groups of independent retailers have re- 
quested the Loose-Wiles Biscuit Company to make to them deliveries 
similar to those it makes to separate units or retail grocery stores of 
chain systems; to take orders from them as it takes orders from 
separate units or retail grocery stores of chain systems; and have 
offered to pay respondent cash on delivery, or in the same way as 
the chain stores pay; and have further offered to meet any require- 
ments the respondent makes of the chain systems. 


(c) In other instances corporations have been formed in which 
the stock is owned exclusively by retail grocers. These corporations 
have requested the Loose-Wiles Biscuit Company to sell their stock- 
holders or members on the same terms and in the same manner as 
said respondent sells to separate units or retail grocery stores of chain 
systems. These corporations have offered cash on delivery for the 
goods, or to pay for them as the chain stores pay, and to meet every 
requirement that the Loose-Wiles Biscuit Company makes of the chain 
systems. 


The Loose-Wiles Biscuit Company has in every instance refused 
to grant discounts on gross purchases of independent retailers 
associated or combined together as set out in sub-paragraphs (a), 
(b) and (c) of this paragraph, but have continued to sell each 
independent grocer comprised in the above-mentioned attempted 
associations or combinations and to grant discounts only on the 
purchases of each separate member of the association or combina- 
tion. 


PARAGRAPH FOURTEEN: The respondent sells its prod- 
ucts to purchasers operating grocery chain systems, where such 
systems divide their purchases among the separate units or retail 
grocery stores of the system. 


PARAGRAPH FIFTEEN: The respondent refuses to sell as- 
sociations or combinations of independent retail grocers operating 
retail grocery stores similar to the separate units or retail grocery 
stores of the chain store systems, where said associations or com- 
binations divide their purchases among the members of the asso- 
ciation or combination. 


PARAGRAPH SIXTEEN: It costs the respondent no more 
to sell a specified number of purchasers operating independent 
retail stores than it costs to sell the same number of purchasers 
operating separate units or retail grocery stores of chain systems 
buying the same quantities and similarly located. 


PARAGRAPH SEVENTEEN: Respondent’s products, being 
nationally known, make exceptionally good “leaders,’ and the 
chain stores are very frequently using them as such. (When a 
retailer sells a well-known product at a very low price, to attract 
attention and lure customers into his store, he is said to be selling 
such product as a “leader.”) 


PARAGRAPH EIGHTEEN: In many instances the purchaser 
operating an independent retail grocery store, purchasing equal 
amounts with a competing purchaser operating a separate unit or 


retail grocery store of a chain system, can not buy respondent’s 
products at,as Jow a\ price as the separate unit or retail grocery 
store of the chain system is selling such products, because of dif- 
ference in discounts. 


PARAGRAPH NINETEEN: In many instances independent 
retailers purchasing less than $200.00 per month of Loose-Wiles 
Biscuit Company products are unable to successfully compete with 
purchasers operating separate units or retail grocery stores of 
chain systems in the sale of respondent’s products, because of dif- 
ference in the discounts. 


PARAGRAPH TWENTY: In many localities in the different 
parts of the United States independent retail grocers who do not 
carry Loose-Wiles Biscuit Company’s products or who do not sell 
respondent’s products at a price equal to that at which the separate 
units or retail stores of chain systems are selling, such grocers not 
only lose the sale of respondent’s products but also thereby lose the 
opportunity of supplying customets with other commodities. 


PARAGRAPH TWENTY-ONE: That the effect of the appli- 
cation of respondent’s system of discounts, as hereinbefore set out, 
gives to one class of retail grocers an undue advantage in com- 
peting ‘with another class of retail grocers in the handling of 
respondent’s products, which has the capacity to and does tend 
to substantially lessen competition and to create a monopoly in 
the retail distribution of respondent’s products. 


CONCLUSION 


That the practices of said respondent, under the conditions and 
circumstances described in the foregoing findings, are unfair 
methods of competition in interstate commerce and constitute a 
violation of the Act of Congress approved September 26, 1914, 
entitled “An Act to Create a Federal Trade Commission, to define 
its powers and duties, and for other purposes,’ and violate the 
provisions of Section 2 of an Act of Congress approved October 
15, 1914, entitled, “An Act to supplement existing laws against 
unlawful restraints and monopolies, and for other purposes.” 


By the Commission: 
(SEAL) 


Huston THOMPSON, 
Chairman. 
Dated this 23rd day of 
January, A. D., 1924. 
Attest: 
Otis B. JOHNSON, 
Secretary. 


se 2. 
A 
ny 

f Ve 


SECTION EIGHT 


Mail Order Houses and Buying 
Syndicates 
Under What Conditions Should These Buyers Be Sold and 


What Rate of Discount, If Any, Should 
Be Allowed? 


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B) 


SECTION NINE 
Exclusive Agency Agreements 
and Arrangements 


A Frank Discussion of the Advantages and Dangers of 
3) Distributing Through Exclusive Agents as 
* Compared to Competitive Agents 


2) 


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SECTION NINE 


®) e Exclusive Agency Arrangements 


and Agreements 
#86 7c 


PO 
eC. 7 
Form of Exclusive Agency—When and Under What Conditions 
Exclusive Agencies are Profitable— Disadvantages of the 


Exclusive Agency and How to Overcome Them 
Copyright 1924, by J. C. Aspley, Chicago 


General Legal Restrictions: Section 3 of the Clayton Anti- 
trust Act (Approved October 15, 1914) reads as follows: 


J») That it shall be unlawful for any person engaged in commerce, in the 
* iy course of such commerce, to lease or make a sale or contract for sale of goods, 
. wares, merchandise, machinery, supplies or other commodities, whether pat- 
ented or unpatented, for use, consumption or resale within the United States 
.. or fix a price charged therefor, or discount from, or rebate upon such 
price, on the condition, agreement or understanding that the lessee or pur- 
chaser thereof shall not use or deal in the goods, wares, merchandise, machin- 
ery, supplies, or other commodities of a competitor or competitors of the lessor 
or seller, where the effect of such condition, agreement or understanding may 
be to substantially lessen competition or tend to create a monopoly in any 
line of commerce. 


It is clear that this covers only those forms of exclusive 
agency agreements whereby, in return for exclusive territory, 
the agent or dealer agrees not to handle competing products. 
It does not apply to the more common practice of leaving the 
dealer free to handle competing products if he chooses, but 
making the franchise of sufficient value-to induce him to put 
his main effort into pushing the goods. Furthermore, the addi- 
tion of the concluding clause makes it unnecessary for the man- 

. ufacturer of trade-marked goods, under ordinary circumstances, 
F) to worry about the legality of his exclusive agency arrange- 
rl ments. Unless he is in the unusual position where the shutting 
out of competitors from his dealers’ stores will seriously and 
materially reduce the distribution of competing products, or 
prevent the public from having access to competing lines, there 

is little danger of trouble from the Clayton Act. 


1 


Survey and Study of Competitive Trade Practices 
in 289 Different Lines of Business 


SECTION NINE EXCLUSIVE AGENCY ARRANGEMENTS 


Two conditions should be pointed out, however. When a 
concern manufactures a few patented specialties, greatly in 
demand, in connection with a general and extensive line of 
products that are not protected by patents, it is sometimes the 
practice to make exclusive agency agreements for the specialties 
on condition that dealers handle the balance of the line exclu- 
sively. This is a type of “tying contract” which the Section 
quoted was especially designed to prevent, as is evidenced by 
the reports of committee hearings on the law, and the debates 
in Congress. It was frankly enough admitted that this particu- 
lar Section was aimed at the practice of certain large corpora- 
tions, common at that time, of making it possible for buyers to 
secure certain highly necessary patented machines or equip- 
ment, only on condition that they bought other equipment, not 
covered by patent, from the same producer. Furthermore it 
is worthy of note that the Federal Trade Commission is given 
power to enforce this Section. It is advisable, therefore, to 
avoid tying up too obviously the exclusive sale of a specialty 
with the sale of other products. The possibility of losing an 
exclusive franchise for the sale of a popular, widely advertised 
article often is a strong inducement leading dealers to stock and 
push other and less popular lines. There are elements of danger 
in this, however, and considerable care should be exercised in 
using it as a club over the dealer’s head. 


In the second place, it should be emphasized that whereas 
an exclusive agency agreement may be harmless when standing 
by itself, its effect may be quite the reverse when considered 
in connection with other features of a business. If it were com- 
bined, for example, with a system of interlocking directorates 
among competitors, price discriminations in certain territories, 
and a general curtailment of production, it might be construed 
as evidence of an illegal conspiracy, though not in itself neces- 
sarily illegal. In other words, the decision as to whether or not 
an exclusive agency agreement “tends to create a monopoly” 
often depends upon the existence or non-existence of other prac- 
tices tending towards the same object. The legality of such an 
agreement should therefore be considered in connection with 
the general policies of the company, and not as standing by 


itself. 
2 


Survey and Study of Competitive Trade Practices 
in 239 Different Lines of Business’ _ 


SECTION NINE EXCLUSIVE AGENCY ARRANGEMENTS 


To the great majority of business men, the likelihood of any 
difficulty arising from the above conditions may seem to be very 
remote. It is only fair to emphasize once more, however, that 
the enforcement of this section of the Clayton Act is entrusted 
to the Federal Trade Commission, and that a complaint from 
any individual may set an investigation by that body on foot. 
It is advisable, therefore, to secure competent legal counsel 
before putting into effect specific contracts for exclusive repre- 
sentation. 


Forms of Exclusive Agency: Exclusive agency arrange- 
ments vary all the way from a dealer or sales agent who handles 
a single specialty and nothing else, to the retail department 
store that is induced to make a certain line a “leader” by reason 
of the fact that the manufacturer sells no other store in the 
community. Forms of contracts and agreements vary as 
widely; ranging all the way from hard and fast express con- 
tracts, covering all features of the dealer’s operation in minute 
detail, to the mere oral assurance that the dealer will be “pro- 
tected” for an indefinite period. The advantages and disadvan- 
tages of formal contracts are discussed in Dartnell Service 
Report No. 194, on Salesmen’s, Agents’ and Distributors’ Con- 
tracts and Agreements. Subscribers to this Survey who are 
also subscribers to the Dartnell Service, will have that report 
already on file, or it may be purchased separately at $3 a copy. 


Summarizing briefly our findings in the course of that inves- 
tigation, it appears that formal contracts, covering the operation 
of exclusive agents in detail, are practically necessary under the 
following conditions: 


1. When it is the agent’s duty to establish contract relations 
with his customers, by which the company’s rights are affected. 
This applies broadly to such commodities as office and store 
appliances, machinery, musical instruments and household 
appliances sold on partial payments, building equipment sold to 
contractors, heating and lighting equipment, etc. In such cases 
the agent is acting in part as the direct representative of the 
company, and his acts must be definitely controlled and his 
authority definitely limited. 


2. When the agent is entrusted with the job of hiring sales- 
men, who act as representatives of the company, but are not 


3 


Survey and Study of Competitive Trade Practices 
in 239 Different Lines of Business 


SECTION NINE EXCLUSIVE AGENCY ARRANGEMENTS 


directly under the company’s control. The same considerations 
apply here. 


3. When the agent acts as licensee under patents. This does 
not apply to all commodities that are covered by patent, but 
only where the patent license is made the basis of representa- 
tion. In such cases it is necessary to have a definite expression 
of the company’s intention, as well as to control the acts of the 
agent in accordance with it. 


There are also numerous cases where agents render special 
service in installing equipment, or keep it in working order, 
either at the company’s expense, or their own. Under such con- 
ditions, when the good will of the company largely depends 
upon the proper installation or operation of the product, many 
concerns feel that formal contracts are essential. It is neces- 
sary, in other words, to specify definitely and in detail, just 
what the duties of the agent are, and what the customer is 
entitled to by way of free service. 


Aside from the foregoing, however, there seems to be a 


marked tendency to avoid tying the hands of either party with | 


formal contracts, and to rely upon a general understanding ‘as 
to terms and conditions. This leaves the company free to make 
changes promptly when changing local conditions warrant, and 
to alter its policy with less danger of legal complications. In 
several cases we are told that the abandonment of specific con- 
tract restrictions in favor of a general statement of policy has 
resulted in increased activity on the part of agents. Where, for 
example, the retention of an exclusive agency has been based 
upon the securing of a definite, annual quota, the agents have 
consistently secured the quota and no more. Upon abandon- 
ment of this definite figure, however, in favor of an understand- 
ing that the agency should be retained so long as it was profit- 
able to the company, the same agents increased their volume 
of business materially. As one concern puts it briefly: 


“A definite, restrictive contract often serves mainly to check 
the initiative and dampen the enthusiasm of the enterprising 
agent. And the poor agent is not likely to be worth very much, 
whether he is confronted with a contract or not.” 


4 


Survey and Study of Competitive Trade Practices 
in 2389 Different Lines of Business 


SECTION NINE EXCLUSIVE AGENCY ARRANGEMENTS 


The control of exclusive agencies by means of a general state- 
ment of policy rather than a formal contract, has been practiced 
successfully by a large number of concerns. Under ordinary 
merchandising conditions, they serve every practical purpose 
of a formal contract, with the advantage of greater flexibility 
and more latitude for the exercise of initiative. And in the rare 
cases where it is necessary to take them into court, they arc 
likely to be liberally interpreted because it was the obvious 
intent of the parties to make a liberal agreement. This is quite 
as likely to be in favor of the company as against it. We repro- 
duce below the “statement of policy” used successfully for years 
by Stephen F. Whitman & Son, Inc., makers of Whitman 
Candy, as the basis of agreement between the company and its 
local dealers: 

The chief end of the business is to serve the consumer of high 
class chocolates. 

In the manufacturing end this service takes the form of mak- 
ing goods of highest quality and purity, packing them tastefully 
and securely. 

In the merchandising end this service takes the form of plac- 
ing our goods on retail sale in perfect condition at points con- 
venient for consumers everywhere. 

Our protected agency plan is primarily to insure the dealer’s 
active interest in good service, to make him interested, with our- 
selves, in sustaining and increasing the reputation of Whit- 
man’s. 

The rights of a retail agency to protection and where the 
rights of the consumer to good and convenient service begin. 

We have no right to protect an agency in territory in which 
he does not serve the candy consumers and represent the inter- 
ests of Whitman’s. The people in such territory have a right 
to buy our goods conveniently. We have a right and a duty to 
supply them. 

In applying these broad principles to our agency situation we 
find some difficult problems, most of which must be taken up. 
and solved according to circumstances. 3 

The following policy should, however, apply to all: 


1. The grant of a protected agency is not a life contract. It involves an 
obligation on the part of the dealer to cultivate his field, to give our line 
preferred attention. 

5 


Survey and Study of Competitive Trade Practices 
in 239 Different Lines of Business 


SECTION NINE EXCLUSIVE AGENCY ARRANGEMENTS 


2. Any agent who pays his bills and carries our goods in stock is entitled 
to, and must have, due notice and consultation before any change is 
made in his field. 


3. The company reserves the right at any time to insist upon additional 
agencies or, for good cause, to cancel an agency. 


4. We do not establish a second agency that will interfere with the estab- 
lished business of a good agency. 

5. The company is the sole judge as to need of additional agencies. 

6. It is our fixed policy to keep the hearty good will of our established 
agencies in opening new agencies; to present our side fully and get the 
original agent’s consent to the new account. Where he is not open to 
argument we feel safe in promising him increased business as a result 
of the new agency, with an offer of special advertising assistance. 


7. It is our policy to exercise extreme patience with an agency, to sacrifice 
immediate profits for the scrupulous fulfillment of all promises. We 
cannot, however, sacrifice the interests of the company indefinitely for 
an agency that does not live up to its opportunities. 


Forms of express contracts creating exclusive agency rela- 
tions differ among themselves as regards phraseology and terms, 
but tend in the main to cover such matters as territory, remun- 
eration, collections, power to employ sub-agents or salesmen, 
payment of expenses, right to engage in same business after 
termination of the contract, etc. The contract form included in 
this section, used by The Egry Register Company, may be taken 
as a typical example: 


THE EGRY REGISTER COMPANY (A Corporation organ- 
ized under the laws of the State of Ohio) of Dayton, Ohio, 
U. S. A. (Hereinafter referred to as “The Company”) hereby 


appoints and icréates 75 sag cis» oc oes one ee eee eee eee 
Recs Sse Ger eer ete a tare OL os ales oi Se bs a oo 6 Cre ee en 
(Hereinafter referred to. as... ; .s0., «cain toe tae a ee ) 
AB pce Se cele BRIS ethic a taty s alice ine BiCnT in and throughout the 


territory which The Company may designate in writing, for the 
sale of its Registers, Stationery and Supplies, excepting its Rail- 
way Systems and United States Government business, upon and 
subject to the following terms, conditions, restrictions and obliga- 
tions, and with only such power and authority as are hereinafter 


set forth; to all of@rhich thesc44 tr t.0 ven a ee eee 


1. Until further written designation by The Company the ter- 
LICOLY 10) WWAICO GEN Gin vinis anes". oo sei otk vit lets eee shall act shall be: 


Mt 
ie 


Survey and Study of Competitive Trade Practices 
in 2389 Different Lines of Business 


SECTION NINE 


Od wre la OC 2) 0) 8s) © eg fF 0 She HS e608 6 45:6 © © 0 le) lo 6 o 6) © {6 Ie 9) 8) 6 6) 6: 0 86 (hb 6 ee 6) @ 8 W 6 6 6) 8 6) 6 


Steerer! 6, Wow eee 6 Ue) el go 8 @ e,'e (6 6 90) (oF Oe 0 6 10) S16 6,6 1, 6) 16 Sie Ow eve] eee @ « a le ene © 0. aw ea 61066) 6.6 


mi gus oalesuA rency shall ube, know) Ad: keer gaied sinc as ¢ nelne « 
and have no other distinction than: 


3. That this Agreement shall terminate at the option of either 
party by written notice given to the other. 


AER IVG Go chee she c. Sah Aare he Te tk shall devote his entire time, 
energy and ability to the sale, in the aforesaid territory, of Regis- 
ters, Stationery and Supplies dealt in by The Company, and shall 
not sell any second hand Registers unless so authorized by The 
Company. 

5. All Registers, Stationery and Supplies are to be sold at 
regular list prices as furnished by The Company unless otherwise 
agreed upon. 


GLC sss ales Cee ans Bae shall report daily on pointer 
cards all calls and keep The Company informed as to his pro- 
gressive movements from day to day. 

7. All orders to be taken on printed forms furnished by The 
Company, or by letter, in either case signed by the purchaser, no 
sale to bind The Company, until reported to and approved by it, 
unless by specific instructions from the Company. 

31 Oe. te Re i «Ole be aie shall not make any collections 
on account of The Company unless by specific instructions from 
The Company. 


GCSE NG es spratce a pti ei bete rete tee tte ee shall at all times be subject to 
the supervision and direction of ‘The Company. 
LOSPEDES: vase etaagere. week ees shall not have, under any cir- 


cumstances, any right, power or authority to enter into any agree- 
ment on behalf of The Company or to bind The Company for 
payment of any money, or the performance of any obligation, 
except in such case the written consent of The Company is first 
obtained. 


11. Any assistant, sub-sales agent or salesman recommended 
ep emploved) bytthesee< swsic nbc ne? aeons we must be satisfactory 
to and under contract with The Company. 


12. No part of the expense incurred in the sale of Registers 
nor maintenance of the Sales Agency shall be borne by The Com- 
pany, except as provided for in this agreement. 

13. In case a purchaser fails to pay his account, or any part 
thereof, the commission on such unpaid amount shall be charged 
Beate ts 1016 ya bos epee wish claps aus, theta dolar s one account, 


BAGG vs ¢ KPa ke ot A shall be charged with his 
share (in accordance with the rate of commission allowed him on 
such sale) of all attorney’s fees and costs which may be incurred 
in the collection of any accounts for Registers or Supplies or for 
recovering possession of the same. 


7 


EXCLUSIVE AGENCY ARRANGEMENTS 


Survey and Study of Competitive Trade Practices 
in 2389 Different Lines of Business 


SECTION NINE 


EXCLUSIVE AGENCY ARRANGEMENTS 


15. All Registers, Sample Cases, Printed Matters, Price Lists, 
Books, Photographs, Lists, Lessons and all Confidential Circulars, 
System Letters, Specimen Forms, etc., entrusted to the............ 
AM erat be are and do remain the property of The Company 
and subject to its call for return. 


16. The Company agrees to pay the following commission to 


Shes Aw owek dea nion eee 8s nee when the goods are sold at regular 
list prices as furnished by The Company; when sold at less than 
list. prices; the reduction, to. be berne-bycthe ses. eee a ea ee 


and deducted from his commission on such sales: 
Rate of commission at list price: 


Percentuin a (Gas as- %) on Egry Registers now listed by 
The Company, excepting Egry Auditors a commission of 
re Percentumo( beats Peas 

Percentum (..5..: Yo) on new stationery (roll) or supply 
business. 

Percentum (...... Yo) on re-order stationery (roll) or 
supply business. 

Pescentiiai sen. e %) on stationery (flat) unless otherwise 
specified. 


17. Payment of Commissions: 


Full Commission to be entered to the credit of the............ 
ORT Sree on the Commission books of The Company imme- 
diately upon entry of such orders accepted by The Company 
(except) reductions which may have been made from list price 
as provided in the foregoing) one-half (4%) of such commissions 
being -advanced,ito (the 0% eee Nice ee on the regular 
weekly commission payment day, the balance one-half (1%) being 
paid when the account is collected. Payments may be deferred 
until the first and fifteenth of each month at the option of the 
OVAL i MRC aan. dei 2 a It is provided, however, and agreed 
that The Company may retain a sufficient amount of deferred 
commissions to protect and secure it against any contingency 
which may arise. 


18. The term “New Business” referred to in the foregoing 
shall consist of new business either for Registers, Stationery or 
Supplies secured and submitted hy! thes. 25eeGeeeeee. oe 
and accepted by The Company, or submitted by the customer pro- 
wed thiet’s. 4: Pysaetelant ei ane will have filed a prospect card 
with The Company showing a visit at the place of business of 
the prospect within a period of ninety (90) days antedating the 
date of the order. 


19. “Re-order Business” referred to in the foregoing for either 
Stationery or Supplies shall consist of such orders submitted by 
tre fut ds Gere. Ga hein, from, present customers or their suc- 
cessors; such , orders! being» taken, by ithe os he neue Aree ee eae ee 
submitted to and accepted by The Company, or accepted 
“reorder” business received direct by The Company from the 


8 


» 


Survey and Study of Competitive Trade Practices 
in 289 Different Lines of Business 


SECTION NINE EXCLUSIVE AGENCY ARRANGEMENTS 


Customer provided the. 2. te. sat Gaels has filed with The 
Company a “Report of Call on User” form showing a call at the 
place of business of such user within a period of ninety (90) 
days antedating the date of the order. 


20. All Registers and Supplies shall be sold f. o. b. Dayton, 
Ohio, unless otherwise agreed upon. 


PASO S EO tempat ys olareleteteibatatate loti ale agrees and binds himself to 
keep absolutely inviolate any of the trade secrets of The Company 
both during his employment or afterwards and shall not disclose 
any of such trade secrets to any one other than The Egry Register 
Company, without its written permission. 


22. In consideration of $1.00 to him in hand paid, the receipt 
of which is hereby acknowledged, and certain other valuable con- 


siderations and’ » Concessions, / the, ses ~ks se age ek eles gS hereby 
binds himself and agrees that he will not, either directly or indi- 
rectly, engage in the Autographic Register or Register Supply 
Business, or act in the capacity of Agent, Representative or Sales- 
man, either directly or indirectly for any company so engaged in 
the manufacture or sale of Autographic Registers and Supplies, 
for one year from date of termination of this agreement. 


LINE os Ge et ore Bld te Lk a oe shall be under bond to The 


CSA DY fil CO SUL Od Serena ng a eee sy stg ee en ard eats g's he Dollars. 

24. It is specifically agreed that the signing and execution of 
this writing shall create a contract under and subject to the laws 
of the State of Ohio, and shall not be construed under the Jaws 
of the place where the Sales Agency is located. 


25. The termination of this Agreement for any cause what- 
ever shall in no way affect or impair the claims of The Company 


SQAUIISt Doele ic ack as Staats nk. Seren td Cad ables wlavele s wile. WARES eles 


26. This contract supersedes and takes .place of all prior 


Ber cements. DECWEEN fic eeras eh vieeis wie se + and The Company, 
but in no way affects or impairs any claims of The Company 


BEATS ies low te sos AO + ates Ma gierete et enters nein age 458. existing at the 
date hereof. All other contracts or promises heretofore made are 
hereby annulled. ‘This contract is not to be altered, varied or 
changed or added to in any manner and such amendment or 
writing shall not be binding upon The Company unless signed 
by a duly authorized ofhicer of The Company under its corporate 
seal. 

27. This Agreement is void, unless signed and returned to The 
Egry Register Company, Dayton, Ohio, within (........ ) days 
from date. 


Survey and Study of Competitive Trade Practices 
in 2389 Different Lines of Business 


SECTION NINE EXCLUSIVE AGENCY ARRANGEMENTS 


IN WITNESS WHEREOF, the said, THE EGRY REGISTER 
COMPANY, has caused these presents to be executed in its behalf 


DY. 15S 2Y cee: seer te ere ean and its corporate seal to be here- 


THe se years tess oer eee has hereunto set his hand in accept- 


ance. of ‘these: presents! thisau. op sie Anon oe nee Fels tae ee day 


sia 06 6 0 eve © wile 6» eqs a 6) 6) a0 ple) 6) of @ 60pm @ ‘ole fe) a6. 0.01094. 8. 9 16 (0 Ve Pre oem ee ele 


Sign here. 
Withee 2 omic esas cutie cate ky 2 Fae eee veers a ne tae nei rc 


Witness ioe co oclals dianeiéy, Cela Fe ae te oe Ones Ee earn ee ete ate cnn a er 


Where Exclusive Agencies Are Profitable: Broadly speak- 
ing, it is seldom profitable to employ exclusive agencies (par- 
ticularly retail agencies) for the distribution of what are com- 
monly known as “convenience goods.” The public is firmly 
settled in the habit of expecting to buy such commodities as 
flour, sugar, canned goods, ribbons, notions, household remedies, 
toilet accessories, etc., etc., in the place that happens to be most — 
convenient, and a profitable business in such commodities 
usually depends upon wide distribution. On the other hand, 
those goods which are commonly bought only after a study of 
their merits or a comparison of values, lend themselves more 
definitely to limited distribution through exclusive or protected 
outlets. In the one case the consumer is generally unwilling to 
seek out the particular store where a certain brand may be 
had; in the other he is likely to do so in the course of shopping 
about, or he will not buy at all unless the goods are brought 
to him and forcefully presented. As a general rule, therefore, 
it may be said that the nearer the goods approach the class of 
staple commodities that people expect to buy “anywhere,” the 
less likely are exclusive outlets to prove profitable. The buying 
habits of the public are the first and the main consideration in 
determining whether or not to adopt exclusive agencies. This 


10 


Survey and Study of Competitive Trade Practices 
in 239 Different Lines of Business 


SECTION NINE EXCLUSIVE AGENCY ARRANGEMENTS 


is not the sole consideration, however, for there are often other 
factors that may seriously modify a decision. 


Stephen F,. Whitman & Son, for example, sell candy; a com- 
modity that belongs clearly in the “convenience” classification. 
Yet the company has been successful for many years on a basis 
of limited representation, literally exclusive in some localities, 
and definitely restricted everywhere. There are two reasons for 
this: the first and the main reason being the perishable nature 
of the product. The customer who buys a box of candy that is 
stale, or deteriorated, or imperfect in some noticeable respect, 
is very likely not to purchase the same brand a second time, 
or to refuse it if offered by the retailer. With a trade-marked, 
nationally advertised commodity, this unfavorable opinion is 
most likely to react against the manufacturer rather than against 
the dealer. From the Whitman standpoint, therefore, it is of 
primary importance to insure the product’s reaching the ulti- 
mate consumer in good condition, and this can only be done 
effectively through controlling the distribution. The company 
sells through its own branch offices, not through jobbers, and 
selects only such retail customers as will take proper care of 
their stocks. This system also gives the company a check 
against selling the retailer more goods than he can dispose of 
before they become deteriorated, and enables it to replace old 
stock with fresh goods when necessary. 


The second reason is the advantage gained by this system 
in securing prominent display of the goods, and the interest 
of the dealer in making them a leader. Candy is in a peculiar 
sense a commodity that is purchased casually. Display is of 
enormous importance, not only as a means of promoting the 
sale of a certain brand, but as an inducement to buy candy at 
all. It is probable that more than half of the candy sold in a 
year is bought on this casual, whim of the moment basis, and 
the factors of prominent display and dealer interest are of 
exceptional importance. 

Another point to be considered in deciding whether or not 
to limit distribution to a few selected agencies, is the matter 
of service that must be rendered in making an acceptable sale. 
The more definitely this element of service enters into the 


11 


Survey and Study of Competitive Trade Practices 
in 239 Different Lines of Business 


SECTION NINE EXCLUSIVE AGENCY ARRANGEMENTS 


transaction, the more likely is the exclusive agency to be prac- 
ticable. Where satisfaction with the product depends upon 
proper installation and careful instructions concerning opera- 
tion, exclusive, or limited, distribution is almost a practical 
necessity. As service grows less and less important, exclusive 
agency systems grow less and less frequent, until we reach the 
class of chewing gum and cigarettes, hair nets and spool cotton, 
where the idea of exclusive representation would be nothing 
short of fantastic. There are many concerns operating success- 
fully through exclusive dealers in the shoe trade, and in men’s 
and women’s ready-to-wear clothing, where careful fitting is a 
large factor. The same is true of corsets, but seldom in connec- 
tion with such items as muslin underwear, hosiery, neckwear, 
CLG 


Again, the surroundings in which goods must be shown to 
advantage, often are important. The prestige of a fine product 
may easily be injured if it is carelessly handled or displayed in 
shabby or disorderly surroundings. Jewelry and silver ware, 
fine musical instruments, and the like, are frequently given 
exclusive representation for this reason. There are other prod- 
ucts which cannot be adequately presented without a large 
investment on the part of the dealer, who must keep assortments . 
complete in order to satisfy customers from a given line. This 
applies to paints and varnishes, many lines of mechanical equip- 
ment, building supplies, etc.; also more or less definitely to 
shoes, clothing and household goods where it is necessary to 
present a wide variety of styles, patterns or sizes. Finally, there 
are occasional instances where the superiority of the product 
depends upon certain features of construction that require intel- 
ligent demonstration, and it is necessary, at least at the start, 
to select local representatives capable of rendering this service. 


Advantages of Exclusive Agencies: The big, outstanding 
advantage of the exclusive, or selected, agency system is its 
superiority as a means of increasing the reputation of the goods, 
and the prestige of the manufacturer. Seldom or never is this 
system of much value to the manufacturer of goods that are 
unidentified as to origin, by means of trademarks or trade 
names. To the manufacturer of trademarked goods, however, 
it is worth the possible sacrifice of a few sales to insure the 


12 


e) 


Survey and Study of Competitive Trade Practices 
in 239 Different Lines of Business 


SECTION NINE EXCLUSIVE AGENCY ARRANGEMENTS 


standing of his goods in the public mind through adequate 
presentation of their merits. It is probable, for example, that 
the Whitman organization, or the makers of Walk-Over Shoes, 
miss occasional sales because their goods are not to be had in 
all candy stores or shoe stores. This sacrifice, however, amounts 
to nothing in comparison with the marked gain in prestige 
which results from having the goods always presented in ade- 
quate assortments, and under the most favorable conditions. 


Facilitates Dealer Effort: Dealers who are protected in the 
enjoyment of exclusive privileges, are more apt to make an 
effort to push a particular line, and give it special prominence 
in display. Special advertising co-operation can be given to 
exclusive dealers as needed, without incurring the ill will of 
their competitors. It is also much easier to secure advertising 
co-operation on the part of the dealers. The manufacturer can 
also exercise a direct influence to improve the dealer’s selling 
efforts, to build him up, and make it possible for him to buy and 
sell more goods. The George E. Keith Company, for example, 
is able to secure regular monthly statements from its Walk- 
Over dealers, covering inventories, sales, and finances in such 
detail as enables the company to make intelligent and acceptable 
suggestions. Though they are actually independent retailers, 
these dealers become to all intents and purposes members of 
the manufacturer’s organization, open to his suggestions and 
under his control to an extent that otherwise would be 
impossible. 


Simplifies Credits: Credit risks are obviously reduced when 
salesmen are calling upon a limited number of dealers that have 
been selected in advance, or already passed upon by the house. 
Credit is one of the main considerations in appointing a dealer, 
and the closer supervision of his affairs by the company helps 
to keep his credit good. 


Reduces Selling Expense: Salesmen can cover more terri- 
tory, and cover it more efficiently, when calling on exclusive 
agencies. This also facilitates a division of selling effort that 
is of considerable value. Devoe & Raynolds Company, for 
example, sell paints and varnishes through exclusive agencies. 
During the busy seasons, the salesmen concentrate their efforts 
on seeing that the agents’ stocks are kept up—selling goods, in 


ibs 


Survey and Study of Competitive Trade Practices 
in 239 Different Lines of Business 


SECTION NINE EXCLUSIVE AGENCY ARRANGEMENTS 


other words. Then in June and July and October and Novem- 
ber, when consumer demand is slack and stocks are not being 
rapidly reduced, the salesmen concentrate their effort in a drive 
to secure new agents. This eliminates the waste effort during 
the busy season of calling on customers who are not in the 
market, and the discouraging work of trying to sell goods when 
the product is not moving freely. It also enables the salesman 
to do a better job because he is concentrating on one thing at 
a time. 


Reduces Unfair Price-Cutting: When dealers are protected, 
there is less likelihood of their engaging in unfair price-cutting 
because they are not subjected to cut-price competition on the 
same product. Comparatively few dealers are price-cutters from 
deliberate policy, but in the majority of cases are forced to cut 
to meet competition. It is not difficult to eliminate the delib- 
erate cutters from consideration as agents, which generally takes 
care of the problem. It goes without saying, of course, that the 
fear of losing an exclusive agency will often deter a dealer who 
might otherwise be inclined to feature a cut-price as bait. 


Disadvantages of Exclusive Representation: The great 
danger in connection with exclusive agency representation is 
that it may prevent the business from growing as fast as it 
normally should, and at the same time keep the company from 
discovering the fact. Something of this sort happened in con- 
nection with Holeproof Hosiery, which was marketed for years 
through retail outlets. This method was chosen primarily 
because the hosiery was originally sold under a guarantee of 
replacement if it wore through in six months, and retailers gen- 
erally had no sympathy with such a policy. When war condi- 
tions forced the abandonment of the guarantee, however, some 
officials of the company advised the abandonment of the exclu- 
sive agency plan also. Other members of the organization felt 
that this would be suicidal, and in order to prepare a line of 
retreat the company put out Luxite Hosiery, which was the 


same quality under a different name. Sales of Holeproof 


Hosiery. increased materially, however, under the broader sys- 
tem of distribution. Not only did the company make more 
sales, but those dealers that had originally been “exclusive” 


14 


& 


)) 


) 


y 
> 


Survey and Study of Competitive Trade Practices 
in 239 Different Lines of Business 


SECTION NINE EXCLUSIVE AGENCY ARRANGEMENTS 


found their volume of sales increased, often surprisingly, under 
the new arrangement. 


The reason back of this, of course, is the familiar principle 
that leads chain store operators to locate in the neighborhood 
of competing stores, rather than in isolated locations. Not only 
does this place the store where the crowd is in the habit of 
going to buy goods, but it also gets the benefit of emphasis on 
the ‘goods it features, because they are also featured by others 
in the neighborhood. A single display of Gold Medal Flour, for 
example, or Maxwell House Coffee, has no very great attention 
value. But when ten or a dozen displays are seen in close suc- 
cession, the attention value increases in something like geomet- 
rical ratio. 


For the same reason, a product that is featured by only one 
or perhaps two stores in a trading center does not assume any 
very great importance in the minds of the consumer. But when 
it is featured on all sides, it assumes a prominence that is diff- 
cult to secure otherwise. Advertising alone will accomplish 
wonders sometimes, but it cannot often give to goods the pres- 
tige that is secured by adequate distribution, 


This is why most manufacturers of goods in the convenience 
classification, who still rely upon selected outlets, have largely 
abandoned the “exclusive” agent for what is generally referred 
to as “dual agencies.” Instead of the single agent, who enjoys 
the complete suppression of local competition, they employ two 


. or three or more agencies, strategically located so as to serve 


the public to the best possible advantage, and at the same time 
to supplement the efforts of one another in giving the product 
prominence. This is the policy followed by Whitman’s, and 
many others. Two or more stores will generally all do better 
than any one of them could do alone. The benefits of such a 
policy to the manufacturer are fairly obvious. It increases his 
sales materially, as well as the prestige of the goods in the com- 
munity. It also increases the effectiveness of his advertising, 
both that which is run over the names of the dealers, and that 
in national mediums. 


Sometimes concerns hesitate to employ selected distributors 
through fear that, in case it is later necessary to make changes, 
they will offend their most valuable customers and cause them 


15 


Survey and Study of Competitive Trade Practices 
in 289 Different Lines of Business 


SECTION NINE . EXCLUSIVE AGENCY ARRANGEMENTS 


to “throw out the line.” Experience seems to show, however, 
that there is very little substance to that fear; or at least that 
there is little danger to be apprehended if the original agreement 
is properly drawn, and the situation handled with tact and 
restraint. In most cases the dealer that is of large enough 
calibre to warrant his selection as an exclusive agent, is intelli- 
gent enough to grasp a sound argument. Very few concerns 
report any serious difficulty in this connection, and in those 
cases where trouble is experienced it is likely to be due to the 
fact that rash promises were made in the first place, or the situa- 
tion was handled in too arbitrary a manner. An occasional 
dealer may throw out a profitable line in order to spite the 
manufacturer, or out of belief that the manufacturer cannot get 
along without it. In the majority of cases, however, they are 
likely to come back later on when it is clearly demonstrated 
that they are losing money by the action. 


As a Competitive Weapon: Exclusive agencies are some- 
times used to keep competing lines in the background, through 
the express or tacit understanding that the agents will not 
handle competing products. The concern that can tie up the 
best retail outlets in its field is in a strong position relative to 
competition, which is crowded into the less efficient stores. This 
practice, however, is much less frequent than it used to be, partly 
on account of the activities of the Federal Trade Commission 
and the courts, and partly because the dealers themselves are 
growing more and more unwilling to fall in line with it. There 
are very few lines left today in which there is a single concern 
that enjoys undisputed leadership, with no near contenders for 
the crown. In most lines there are two or three products which 
the retailer simply must stock in order to serve his trade, and 
he is seldom willing to pass up the privilege in return for exclu- 
sive rights on any one of them. 


On the other hand, exclusive agency relations often serve to 
limit competition for the reason that dealers will carry complete 
stocks of the goods for which they have exclusive rights, which 
often means that stocks of competing goods are broken or in- 
complete. It goes without saying that the more of his working 
capital a dealer can be induced to invest in a given line, the less 
he will have to invest in competing lines. 


16 


~ 
\ 
\ 


FILE—Competitive Trade Practices—Section IX 


Exclusive Agency Contract and Agreement 


Agent’s Contract 


THs AGREEMENT) made this .i70 oo owe sis sie tae ee al bls day of 


Feta Nee UNA AL hielo wl 192....by and between THE H. N. WHITE 
COMPANY, a corporation of Cleveland, Ohio, manufacturers of 
King Band Instruments, hereinafter called the Company, and 


erseceoeeeee eee eres exe FF eos eeseesee eee eevee e ee eeersee eee THe FF HHH HO 


Po pgs Re St STEED ee RS A eA SIN athe State non) woe sec eu au 
hereinafter called the Agent, WITNESSETH: 


That in consideration of the mutual covenants herein contained, 
and for other valuable considerations by each from the other 
received, said parties hereby agree with each other as follows: 


1. The Company hereby appoints the Agent as its representative 
to sell King Band Instruments upon the terms and conditions here- 
inafter set forth in the following territory: 


2. The Agent hereby accepts the appointment to sell King Band 
Instruments upon the terms and conditions herein set forth in the 
territory above described, and agrees to promote the sale of said 
instruments actively and continuously in said territory to the best 
of his ability. 


3. The Agent agrees not to sell any other line of high-grade 
band instruments competitive with the products manufactured by 
the Company. 


4. The Company agrees to pay the Agent commissions for all 
sales made and completed by the Agent subject to the conditions 
hereinafter stated and according to the schedule hereinafter set 
forth, which commissions shall be accepted by the Agent as full 
compensation for his services. 


(a) A commission of....... % will be paid on cash sales of 
New Band Instruments and merchandise bearing the King Trade- 
mark or manufactured by the Company, this commission to be 
computed on the prevailing list cash prices, and payable upon 
receipt of payment in full. 


(b) A commission of ....... % will be paid on lease contract 
sales of New Band Instruments and merchandise bearing the 
King Trademark or manufactured by the Company, this commis- 
sion to be computed on the prevailing list cash prices payable as 
follows: one-half of the commission upon receipt of properly 
signed and executed lease accompanied by the down payment, the 
remaining half of the commission to be paid upon receipt of the . 
full amount of the lease contract by the Company. 


17. This contract shall remain in full force and effect until 
terminated by mutual agreement, but either party hereto shall 
have the right to terminate the same by giving to the other ten 
(10) days notice in writing, and in case of such termination the 
Agent shall immediately return to the Company all unsold mer- 
chandise in his hands, or otherwise dispose of the same according 
to the orders and directions of the Company, and render a full 
and complete accounting to the Company of his transactions. 


IN TESTIMONY WHEREOF the parties hereto have here- 
unto set their hands and afhxed their seals this.........-...ee+¢- 


eectocecereeoscee eee eeeeeereeesreeoeseeeeereseeeee es ee 


ecoctoeereceereeeceeeeecee eee eo eee eee eee eee eee eee eee 


Rules and Regulations 


1. All representatives must actively and continuously promote 
sales of King Band Instruments. 


2. List or catalogue prices must be strictly adhered to except upon 
our written authorization to do otherwise. 


3. No guarantee shall be given other than the standard guarantee 
of The H. N. White Company. 


4. No sales shall be made to persons until satisfactory credit has 
been established. 


5. Each representative is responsible for all instruments sent to 
him for trial or demonstration to prospects and shall report 
promptly upon expiration of authorized trial period. 


6. No agent or representative is allowed to collect payments from 
customers. 


7. The Agent must make all sales in accordance with the spirit 
and principle of the “Code of Ethics” recommended by the 
National Association of Band Instrument Manufacturers. 


8. The Agent must make weekly reports giving in detail his 
activities during the week in the promotion of sales of King 
Band Instruments. 


9. Any violation of the rules, regulations or instructions of The 
H. N. White Company by the Agent is sufficient reason for 
revoking agency privileges. 


SUPPLEMENTARY NOTES 


SUPP 
LEMENTARY NOT 
ES 


& 


Ds 
ry) 


SECTION TEN 


Price Cutting and Unfair 
Competition 


Resume of Plans Used by Various Concerns in Meeting 
the Competition of Unfair Rivals 


if. 


SECTION TEN 


Price-Cutting and Unfair Competition 


Practical Methods to Minimize Price-Cutting—When Business 
Character is Defamed—Bribery of Employees or Agents 


Copyright, 1924, by J. C. Aspley, Chicago 


I. Price-Cutting 


been produced for the purpose of forcing distributors to 

respect the resale prices specified by the manufacturer. 
For the most part these plans have been evolved by the best 
available legal talent, and at some time or other all of them have 
been touted as the final solution of this vexed and perplexing 
problem. In spite of all the talent and money expended in their 
behalf, however, they have without exception met with prompt 
condemnation on the part of the courts. Since the establishment 
of the Federal Trade Commission in 1914, this body has been 
energetic in bringing actions and filing orders against concerns 
that attempted to enforce any system of price-maintenance. And 
though it is reported that the present Commission entertains a 
divided opinion on the subject, at least in theory, there is no indi- 
cation of any relaxation in connection with its practical applica- 
tion of the law. It can be set down definitely that so long as the 
manufacturer sells his goods outright to the jobber or retailer, 
and parts with the title to them, the present law forbids any 
organized attempt on his part to control the price at which they 
may be resold. Barring a change in the law, such as the enact- 
ment by Congress of the long-pending Kelly bill, there is no 
present likelihood that any plan for preventing price-cutting will 
escape condemnation. 


[ ) vee the past fifteen years or so, plan after plan has 


The Record of “Price Maintenance” Decisions: None the less, 
a resumé of the general subject is of some present importance; 
partly as a means of showing what in particular to avoid, and 


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largely as a demonstration of the general futility of the schemes 
that are still from time to time recommended to business men. 
We know of a number of instances in which concerns have em- 
ployed self-constituted experts who claimed to possess sure-fire 
price maintenance systems, only to find themselves involved in 
painful and expensive legal proceedings the moment they put 
the plans into effect. 


Bobbs-Merrill and Miles Medical Cases: The record of im- 
portant price-maintenance cases begins in 1909 with the case of 
Bobbs-Merrill Company vs. Straus* (210 U. S. 339) in which 
the Supreme Court declared that the possession of a copyright 
did not carry with it the right to fix the price at which copy- 
righted books should be resold by dealers. Then, in 1911, came 
the famous case of Dr. Miles Medical Co. vs. Park & Sons (220 
U. S. 373) in which the Supreme Court reviewed the practice, 
quite common at that time, of making contracts with wholesale 
distributors which provided for the maintenance of resale prices 
on the part of retailers. This practice, the court decided, was a 
violation of the Sherman Act which forbids agreements, com- 
binations, and conspiracies in restraint of trade. Though dealing 
with a specific set of circumstances, the Dr. Miles Medical deci- 
sion was broad enough to put a very effective quietus upon the 
practice of making price-maintenance contracts, whether directly 
or indirectly. 


The Mimeograph Case: Shortly afterwards hope revived, 
however. The Supreme Court handed down a decision in the 
case of Dick Mimeograph Company vs. Henry (224 U. S. 1) in 
which it held that since the owner of a patent had the exclusive 
right to “make, use and vend” the patented product, he had the 
right to specify at the time of sale that it should not be used 
except in connection with supplies or accessories furnished by 
himself. The seller of a patented mimeograph, in other words, 
had the right to enforce its use only in connection with paper, 
ink, etc., of his own providing, or his own selection. Obviously 
then, it was argued the owner of a patent would have the right 
to specify the price at which his goods should be resold, if he 
gave notice of the requirement at the time of purchase. All that 
the manufacturer had to do was to combine his goods with some 


2 


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feature on which there was a valid patent, and attach a notice 
to the effect that they were not to be sold except at a certain 
price. 


The Sanatogen Case: This theory was promptly put into 
practice by a large number of different concerns, and eventually 
reached the Supreme Court in the case of Bauer Co. vs. O’Don- 
nell (229 U. S. 1), Bauer being the manufacturer of Sanatogen, 
and O’Donnell a cut-rate druggist of Washington, D. C. In its 
opinion the court declared that it was one thing to sell patented 
goods to original purchasers with a stipulation as to the manner 
in which they should be used or sold, and a quite different thing 
to attempt by a mere notice to control the acts of subsequent 
purchasers. The manufacturer in putting his goods on the open 
market had parted with his exclusive right to “make, use and 
vend,” and he could not reassert that right thereafter by a mere 
notice attached to the package. 


Nothing daunted, however, the contrivers of price-mainte- 
nance schemes pointed out that, though the court had carefully 
refrained from saying so, it had implied that so long as the man- 
ufacturer technically retained his exclusive right, he could 
maintain prices. Instead of selling the goods outright, then, let 
him merely “license them for use” on a royalty basis, and collect 
the royalty in advance. Thus, in the eyes of the law he would 
retain title to the goods, and all of the rights conferred on him 
by the patent. In spite of the fact that this was plainly a mere 
subterfuge, a number of concerns persyiaded themselves that the 
courts would uphold them in it. 


a The Victor-Macy Case: Among others, the Victor Talking 


Vhs VC RR. 


Machine Company adopted a new form of “license agreement” 
by the terms of which its products were not “sold,” but were 
licensed for use only, upon payment of advance royalties. And 
in the case of Victor Talking Machine Company vs. Straus et al. 
(222 Fed. 524) the courts pricked the bubble so effectually that 
the theory of price-maintenance based upon the patent law was 
sunk without a trace. 


The Right to Refuse to Sell: The Victor case was decided 
in March, 1915. In July of that same year the United States 


3 


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District Court at New York rendered a decision in the case of 
The Great Atlantic & Pacific Tea Company vs. Cream of Wheat 
Company (224 Fed. 566) that aroused new hopes. The Cream 
of Wheat Company had adopted the policy of refusing to sell its 
product to the chain store outfit, on account of its price-cutting 
policy, and had requested its jobbers and wholesalers to refuse 
also, whereupon the A. & P. promptly filed suit alleging a con- 
Spiracy in restraint of trade. The court decided, however, that 
since Cream of Wheat was merely one of a large number of sim- 
ilar or identical products, the manufacturer’s action in withhold- 
ing it from a particular distributor did not unduly restrain trade 
in the commodity itself, or tend to create a monopoly in it. 
The court’s opinion was based upon the undeniable fact that the 
company possessed a legal monopoly of the goods sold under its 
trade-mark, and it could sell or refuse to sell them at pleasure, 
since in so doing it did not prevent others from buying or selling 
the same commodity apart from the trade-mark. This reasoning, 
it was believed, would apply to any trade-marked commodity 
under ordinary conditions, and the belief was strengthened by 
the Supreme Court’s pronouncement in the Government’s case 
against Colgate & Company (250 U. S. 300), that: 


“Tn the absence of any purpose to create or maintain a mo- 
nopoly, the act (the Sherman Act) does not restrict the long- 
recognized right of trader or manufacturer engaged in an 
entirely private business, freely to exercise his own independent 
discretion as to parties with whom he will deal. And of course 
he may announce in advance the circumstances under which he 


will refuse to sell.” 


Federal Trade Commission vs. Beechnut Packing Co. Recent 
attempts to restrain price-cutting have largely been based upon 
this right to “refuse to sell,’ and the effort has been to keep 
goods from getting into the hands of those who are disposed to 
cut prices. The great difficulty is, however, that it 1s practically 
impossible to do this systematically on any extensive scale with- 
out maintaining blacklists, instituting boycotts, and enlisting 
the aid of customers in reporting cases of price-cutting on the 
part of their competitors—in a word, espionage. All of these 
practices are regarded by the Federal Trade Commission as 


4 


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SECTION TEN. PRICE-CUTTING AND UNFAIR COMPETITION 


“unfair methods of competition” within the meaning of the 
Trade Commission Act, and the Supreme Court has upheld the 
Commission’s view of the matter in the Beechnut Packing Com- 
pany case (257 U.S. 441). Following the Beechnut decision, the 
Commission filed complaints in more than 100 cases of this char- 
acter, and activities of this nature usually result in a formal 
complaint by the Commission, followed by an order to cease and 
desist from the specific practices which are indispensable to 
make the plan effective. 

It is significant to note that the practices condemned by the 
Supreme Court in the Beechnut case are these: 

1. Reporting the names of dealers who do not observe resale 
prices. 

2. Causing dealers to be enrolled upon lists of undesirable 
customers. 

3. Employing salesmen or agents to assist in reporting deal- 
ers, and in withholding orders from those who cut prices. 


4. Utilizing numbers or symbols upon packages or cases in 
order to detect price-cutters, or jobbers who sell to price-cutters. 
And 

5. Utilizing “any equivalent co-operative means of accom- 
plishing the maintenance of prices fixed by the company.” 


The manufacturer’s right to refuse to sell to certain customers 
remains unchallenged. But he cannot employ others to assist 


- him in exercising that right on a practically effective scale, nor 


can he co-operate with others in doing so. While we do not say 
that it is impossible to produce a plan which will avoid the pro- 
hibited practices and at the same time provide practical results, 
we do say that it is extremely improbable. And when it is re- 
membered that by merely writing a letter to Washington, a 
disgruntled retailer can start an investigation by the Federal 
Trade Commission, it is clear that manufacturers should use 
considerable caution in issuing instructions to salesmen and 
others covering this subject. In particular they should avoid 
the patent-medicine fraternity of business doctors who offer 
ready-made plans with the glib assertion that they are within 
the law. 


Survey and Study of Competitive Trade Practices 
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SECTION TEN. PRICE-CUTTING AND UNFAIR COMPETITION 


The Kelley Bill: Since 1913, the American Fair Trade League 
has been advocating the enactment by Congress of a definite 
statute, permitting the manufacturer of trade-marked goods to 
fix and control resale prices under certain restrictions. Several 
different bills have been drawn, which vary in minor particulars, 
but provide in general for the maintenance of resale prices by 
manufacturers of trade-marked goods who will standardize trade 
and quantity discounts and make public their full schedule of 
prices. Opinions differ widely as to the practical benefits of such 
a law, or the number of concerns that would be likely to avail 
themselves of it, but its enactment would at least demonstrate 
that Congress did not regard this form of price-maintenance as 
violative of the principle expressed in the anti-trust laws. 


There is no reason, of course, why business men should not 
join in advocating the enactment of such a measure if they ap- 
prove it, but the chances of success, in our opinion, are very 
slight. 


Equity as a Possible Remedy: It has frequently been sug- 
gested that though the manufacturer cannot reasonably expect 
to secure the positive right to force his customers to maintain 
resale prices, he can obtain relief from unfair price-cutting in 
individual cases through the medium of injunctions against un- 
fair competition. If he can bring evidence into a Court of Equity 
to show that the cut price is merely a device to trade on the 
good will of the manufacturer, thereby injuring both the manu- 
facturer and competitors of the store as well as misleading the 
public, he-can secure an injunction against the use of his name 
or trade-mark in such a connection. The dealer would not be 
enjoined from selling the goods at cut-prices, but would be com- 
pelled to abstain from advertising the cut price in connection 
with the manufacturer’s name. ‘This, obviously, would destroy 
any incentive for price-cutting of this particular sort. If the 
dealer could not use the manufacturer’s name, he could not use 
the cut-price as “bait” to get people inside the store, or to cre- 
ate the impression that other goods were sold at correspondingly 
low prices. Some of the leading authorities on unfair competi- 
tion in the legal profession believe that this is the only prac- 
ticable method of checking price-cutting by legal means, and 


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SECTION TEN. PRICE-CUTTING AND UNFAIR COMPETITION 


that it would be effective. Two or three injunctions against 
notorious price-cutters would prove a strong deterrent against 
similar attempts by others, and by establishing a few prece- 
dents of this kind the courts might be led to take a more favor- 
able view of the manufacturer’s attitude on the subject. This 
view of the problem was discussed in some detail in “Sales Man- 
agement” Magazine for June, 1923, page 697: “Is This the Way 
Out of the Price-Maintenance Muddle?” by Roy W. Johnson. 


Practical Methods to Minimize Price-Cutting: Though it is 
extremely dangerous to attempt the prevention of price-cutting 
by organized direct action, a good deal can be done to minimize 
it, especially at the start. After the trade has gotten into the 
habit of cutting the price on a given article, it is a good deal 
harder to check the practice than to prevent widespread cutting 
in the first place. 

There are three general classes of price-cutters. (1), Those 
who deliberately adopt the policy of price-cutting on standard- 
priced goods for the purpose of trading on the manufacturer’s 
reputation. These are comparatively few in number, and are 


generally easy to identify. (2), Those who cut prices because 


they consider themselves forced to do so by competition. These 
are much more plentiful, since they include the great majority 
of retailers who merely follow the leader. And (3), Those who 
cut prices in connection with legitimate clearance sales, because 
they have been overstocked, or because the manufacturer has 
oversold the market by taking on too many dealers. The rem- 
edy to be applied will vary according to these circumstances, and 
the first step is a careful analysis of the situation to determine 
the real reason why the price is cut. 


Price-cutters of the first class are frequently large department 
stores, or chain store organizations, that buy direct at or near 
the jobber’s price, and buy in quantities that entitle them to the 
largest discounts. Something can be done by adjusting quan- 
tity discounts so as to induce buying in smaller quantities, and 
to reduce the spread between the price paid by the big buyer 
and the cost to the small retailer. More can be accomplished 
by refraining from over-emphasis of price. A cut-price is not 
particularly obvious unless the standard price is well fixed in 


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SECTION TEN. PRICE-CUTTING AND UNFAIR COMPETITION 


the minds of consumers, and there is less temptation to select a 
specific article for cutting when the manufacturer does not him- 
self emphasize the standard price. This is especially true with 
respect to “convenience goods,” like food products, for example, 
which are often sold at varying prices by chain stores and inde- 
pendent retailers in the same neighborhood. If no standard 
price is advertised, consumers get in the habit of expecting to 
pay a few cents more or less from time to time, and the price 
cuts are not so obvious. In a number of instances concerns re- 
port that they have been able to lessen the effect of this type of 
price cutting by emphasizing the quality, convenience or econ- 
omy of the goods, and letting the standard eS idea slip into 
the background. 


Turning to the second class of price-cutters—those who 
merely follow the leaders—many concerns report considerable 
success through missionary work on the part of salesmen and 
others calling upon the trade. In some instances meetings of 
independent retailers have been held to discuss the subject; in 
others the individual retailer has been shown that it is needless 
folly to meet every cut in price that is featured. This process is 
slow, and neither spectacular nor invariably successful. It may 
be doubted if it has anywhere resulted in the maintenance of 
absolute, standard prices, or even absolutely uniform prices; but 
it has frequently checked the progress of price-wars among re- 
tailers, and secured the maintenarice of price levels that will in- 
sure some margin of profit. A salesman who has a retailer’s 
confidence can oftentimes persuade him that he does not need 
to sacrifice his profit on certain goods, and induce him to try the 
experiment for a month or two and see what happens. 


Price-cutting of the third class can generally be minimized 
by a better analysis of the requirements of the trade, and read- 
justments of the manufacturer’s own policy. Clearance sales can 
be partly avoided by refraining from overstocking dealers, and 
sometimes by a better selection of dealers. In some instances, 
concerns manufacturing seasonable merchandise have been able 
to organize the trade on the basis of one or two definite “clear- 
ance periods” a year, at which time all dealers are clearing stocks 
simultaneously. During the balance of the year, all dealers are 
selling at practically uniform price levels. 


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Bankrupt sales can be minimized by watching credits care- 
fully, and at times it is possible to buy back the goods in order 
to keep them out of the hands of brokers. Some of the trade 
associations, particularly in the garment trades, are doing no- 
table work in preventing needless bankruptcies. With perhaps 
the majority of dealers, there are times when they could tech- 
nically be declared bankrupt, if three of their largest creditors 
chose to force the issue, yet essentially their business may be 
perfectly solvent, given time and a little merchandising assist- 
ance. The manufacturers affiliated in the Associated Dress In- 
dustries have organized themeslves to meet this situation, and 
to prevent needless bankruptcies by a study of the individual 
retailer's problems and extending specific advice. There is at 
least a suggestion here for manufacturers in other lines to con- 
sider. 

There are times when price-cutting by retailers is encouraged 
by reason of the fact that there are too many jobbers competing 
for the business, and the latter are cutting prices against one 
another. A retailer that is able to get a price concession from 
the jobber, is likely to see a chance to cut the consumer’s price 
without sacrifice of profit. The remedy for this is obviously a 
better selection of jobbing outlets, perhaps going so far as the 
adoption of an exclusive agency policy. 

Little or no trouble with price-cutting is reported by those 
concerns which sell through exclusive dealers, or dealers care- 
fully selected on a plan of limited representation. This appears 
to be the best—and the only—remedy for price cutting that is 
at all comprehensive. When this is backed by a liberal arrange- 
ment for the return of unsalable goods, it is practically 100 per 
cent effective. The dealer who has a valuable franchise for the 
sale of an advertised commodity, is not likely to risk its loss by 
price-cutting; and there is no direct incentive to cut the price 
when there is no competition in his immediate neighborhood. 


Nota Bene: Material for the foregoing section of the survey 
has been submitted in strict confidence, and could not have been 
obtained otherwise. It is therefore impossible to refer to partic- 
ular concerns, or to quote individuals. The delicate nature of 


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the subject is such that the great majority of concerns do not 
even issue written instructions to their own salesmen regarding 
price-cutting, depending upon oral advice or personal corre- 
spondence referring to specific cases. 


II. Unfair Competition 


It is safe to say that the majority of concerns are more or less 
coming into contact with practices on the part of competitors 
that involve breaches of business ethics and morality. ‘These 
practices cannot be exactly defined, or accurately classified. This 
difficulty was faced by the framers of the Federal Trade Com- 
mission Act, who were obliged to fall back upon the wholly 
vague phrase “unfair methods of competition” in order to de- 
scribe what was to be prevented. Nobody can say precisely 
what that phrase includes or excludes, yet everybody has a fairly 
accurate notion about it. 

From the standpoint of remedies, however, there is an impor- 
tant distinction that should be borne in mind. When the unfair 
practice involves open attacks on a trader’s good will, there is a 
well established legal remedy that the concern can invoke for 
its own individual protection. Ordinarily, however, when this 
element is not involved, the problem of meeting unfair competi- 
tion is quite different. In the latter case, the manufacturer can- 
not asa rule act alone, but must enlist the aid of others: perhaps 
the Federal ‘Trade Commission, some other governmental body, 
or other concerns in the industry that are troubled by the same 
practice. For this reason we are following this gees division 
of the subject in discussing specific practices. 


Passing Off: This is the basis of “unfair competition” in the 
technical, legal sense of the phrase. It includes all the varie- 
gated list of practices that result in passing off, by fraud or 
deception, the goods of one concern as the goods of another: 
trade-mark infringements, imitations of labels, color schemes 
and dress of packages, etc., etc. More than 100 years ago it 
was established that practices of this sort represented wrongful 
injuries against which traders were entitled to relief, and the 
principle has been more and more broadly applied ever since. 


10 


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In order to constitute a clear case of passing off, two elements 
are ordinarily required: the purchaser of the goods must believe 
that they are actually the goods of somebody else, and must be 
led to that belief by deceptive or fraudulent representations. 
Ordinary substitution of one product in place of another, where 
the purchaser is simply persuaded to change his mind, is not 
“passing off,’ because the purchaser is not deceived as to the 
origin of the goods he is buying. Neither is the secret substi- 
tution of inferior or cheaper materials in place of those specified 
ordinarily to be classed as “passing off,’ because there are no 
overt fraudulent representations. Neither is it “passing off” to 
adopt misleading trade terms, such as “Merino” for hosiery not 
made from wool, or “Arctic Seal” for fur made from dyed rabbit 
skins. This practice may be deceptive, and may mislead the 
purchaser into the belief that the goods are something they 
are not, but it is not “passing off” because it does not ordinarily 
deceive the purchaser as to the origin of the goods. It is, in 
other words, injurious to the trade or industry as a whole, not 
to any particular member of it. 


It is not possible to define passing off with any degree of 
accuracy, because human ingenuity is continually at work to 
invent new schemes for accomplishing its results. In general, 
however, it 1s accompanied by open and public imitation of 
trade-marks, labels, packages, color schemes, or other insignia 
by which the public is accustomed to identify particular goods. 
The remedy for it is a prompt and vigorous action for an in- 
junction and damages. Unfair competition of this species is 
not to be temporized with. Even though a specific instance 
of it may seem not to “amount to much,” it is not safe to delay 
action in the belief that the offending concern will soon be out 
of business. The harm that is done by enterprises of this sort 
is not to be measured merely by the loss of immediate sales, 
but by the effect that they have in confusing the minds of the 
public, which is far more important. Furthermore, infringing 
products are generally greatly inferior in quality, and the cus- 
tomer who buys them in the belief that he is getting the genuine 
is most likely to receive an impression of dissatisfaction that 


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SECTION TEN. PRICE-CUTTING AND UNFAIR COMPETITION 


will perhaps last for years. It may seem inadvisable to go to 
the expense of a lawsuit to stop some infringer who appears 
to be not worth bothering with as a competitor, but it is im- 
perative to take this action if it is necessary to stop him. 


As a matter of fact, the concern which neglects to take action 
against practices of this character, runs a certain risk of losing 
its right to protection. The law presupposes that the owner of 
valuable property, such as good will, for example, will be vigi- 
lant in protecting it, and will not be found “sleeping upon his 
rights.” If, therefore, it is found that over a period of years 
a concern has consistently neglected to take action against petty 
infringers of its good will, it is likely to be unable to get relief 
against the “important” infringer when he finally appears. This 
doctrine goes by the technical name of laches, and it has been 
not infrequently resorted to as a defense by those accused of 
unfair competition. We cannot urge too strongly the necessity 
for prompt action when the practice of passing off is discovered, 
even though it may seem trivial and inconsequential at the 
moment. 


Though it is impossible to say with certainty, it is probable 
that unfair competition of this character is increasing rather 
than decreasing, due in large part to the vast increase in the 
number of trade-marks in use, and the carelessness with which 
trade-marks are selected and handled. There are only about 
455,000 words in the Standard Dictionary, and at the very lowest 
estimate there are at least twice that number of trade-marks 
in existence. -Merely as a matter of protection, therefore, we 
would urge our subscribers to use special care in the selection 
of new trade-marks, and particularly to register all trade-marks 
now in use. More can be done to avoid infringement by the 
proper selection of a trade-mark than can ever be accomplished 
by lawsuits afterwards, and a comprehensive public record of 
the trade-marks in actual use in a given industry is invaluable 
to guard against innocent duplications or near-duplications. 
Though some trade associations have attempted to compile a 
list of all the trade-marks in use in their industries, and there 
are a number of directories of trade-marks in special industries 


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as well as private trade-mark bureaus, there is not in existence 
anything like a complete record. The first and most obvious 
step to take is to give warning to possible infringers, innocent 
or otherwise, by registration of all trade-marks in actual use. 


Defamation of Goods or Business Character: Injury to the 
good will of a business does not always depend upon actual 
passing off of goods. Competitors sometimes interfere with the 
sale of goods, and damage a concern’s reputation, by circulating 
misleading reports as to the quality of its goods, the character 
of the house, its standing in the trade, or its credit: by issuing 
threats and warnings as to patent infringement suits: or in other 
ways circulate what amount to business libels and slanders. 
When such expressions go beyond mere “knocking” by sales- 
men, and are clearly made in bad faith, they constitute wrong- 
ful injuries which the courts will recognize. In some cases 
where the injury was continuing and cumulative, as for example, 
where the execution of contracts was interefered with, the courts 


have granted preliminary injunctions to stop the practice pend- 
ing trial of the merits. Under ordinary circumstances, however, 


the remedy is an action for damages before a jury, on the theory 
that a libel is complete when first published, and is not a cumu- 
lative and irreparable injury that can only be met by injunction. 
The Federal Trade Commission has also issued orders to cease 
and desist against a number of concerns employing practices of 
this character. But under present conditions Trade Commission 
procedure is getting to be practically as slow as that of the 
courts, and the Commission has no power to assess damages. 


Other Injuries to Good Will: Human ingenuity is continually 
at work to devise new methods of gaining a competitive ad- 
vantage. Sometimes, intentionally or unintentionally, this 
results in damage to the reputation of a rival concern, even 
though there may be no positive statements that are injurious, 
and no actual passing off of the goods. This has been clearly 
recognized by the equity courts, and the common law doctrine 
of unfair competition has gradually been extended to cover cases 


of this character. 
13 


Survey and Study of Competitive Trade Practices 
in 289 Different Lines of Business 


SECTION TEN. PRICE-CUTTING AND UNFAIR COMPETITION 


How far the courts may be willing to go in this direction may 
be illustrated by a case brought before the United States District 
Court at New York in the Spring of 1922. Gimbel Brothers’ 
department store put on a widely advertised sale of Cheney fou- 
lard silks just at the opening of the Spring season. The goods 
were genuine Cheney Silks, and there was no positive statement 
that was deceptive or misleading. But the price at which the 
silks were offered was sensationally low as compared with the 
current prices in other stores, where the new Spring patterns 
were on sale. The fact was, that the silks offered at the low 
price were not Spring patterns at all, but Fall patterns that had 
been discontinued by the manufacturer and closed out at re- 
duced prices. No mention was made of that, however, and the 
public naturally assumed that the store was offering the same 
patterns procurable sold elsewhere at much higher prices. 
Clearly this was a serious injury to the reputation of the manu- 
facturer as well as to competitors of the store, though no passing 
off was involved, and no direct statements that were fraudulent, 
and the court promptly granted an injunction restraining the 
store from any use of Cheney Brothers’ name in advertising, or 
in connection with the merchandise. 


In general it may be stated that where a practice materially 
injures the good will of a trader, through fraud or misrepresen- 
tation, either open or tacit, there is a very good chance that it 
may be stopped by an equity court. Many practices of this 
character have also been stopped by the Federal Trade Com- 
mission, but the equity procedure is generally much to be 
preferred because by the process of injunction the trader can get 
immediate relief, whereas the Trade Commission now requires 
several months to dispose of an ordinary case. The equity court 
can also give damages to the injured party, and it is not neces- 
sary to show that the case involves interstate commerce or that 
it is in the “public interest.” 


Practices Not Directly Involving Good Will Fraudulent Ad- 
vertising: False and misleading claims by competitors with 
respect to their own goods or their own services, when they 
involve definite misstatements as to fact that admit of proof, 


14 


a 


Survey and Study of Competitive Trade Practices 
in 239 Different Lines of Business 


a 


SECTION TEN. PRICE-CUTTING AND UNFAIR COMPETITION 


are actionable under certain State laws, and have been recog- 
nized by the Federal Trade Commission as an unfair method of 
competition. Mere bombast, or expressions of opinion however 
exaggerated, are not ordinarily unlawful... The Associated Ad- 
vertising Clubs of the World, through affiliation with Better 
Business Bureaus in many of the larger cities, is active in 
handling complaints against fraudulent advertisers and securing 
their prosecution by the State authorities, or by the Post Office 
Department where there is evidence of using the mails to de- 
fraud. There are several forms of State laws on the subject, 
the most satisfactory of which is the “Model Statute” proposed 
by Printers’ Ink in 1911. This form of statute is now in force in 
the following states: | 


Colorado, Michigan, Ohio, 

Idaho, Minnesota, Oklahoma, 
Indiana, Nebraska, Oregon, 

Iowa, Nevada, Rhode Island, 
Kansas, New Jersey, Virginia, 
Kentucky, New York, West Virginia, 
Louisiana, North Dakota, Wyoming. 


Misbranding: Misstatements on labels or packages as to the 
nature or the quality of the goods, or the materials from which 
they are manufactured, have been given considerable attention 
by the Federal Trade Commission, and some of the most valu- 
able work the Commission has done lies in this direction. The 
agitation for general legislation on the subject crops up every 
now and again in Congress, but has never gotten anywhere. It 
is very doubtful if a general statute could be drawn that would 
not work injustice on account of the widespread use of trade 
terms that are literally inaccurate, but in no proper sense mis- 
leading. Much misbranding is undoubtedly due to the absence 
of any definite standards accepted by the industry as a whole, 
and until industries do arrive at some agreement on standards 
it is useless to expect Congress to supply them. 


Deceptive Trade Terms: This again is a subject with which 
the Trade Commission has wrestled, sometimes to good pur- 
pose, and sometimes not. ‘The question as to whether a term 


15 


Survey and Study of Competitive Trade Practices 
in 239 Different Lines of Business 


SECTION TEN. PRICE-CUTTING AND UNFAIR COMPETITION 


is deceptive or not depends upon the sense in which it is ac- 
cepted by the trade and by the public. More can be done 
through co-operative effort to establish standards by the in- 
dustry itself than by attempts to prosecute individual offenders 
in the absence of any recognized standards. Thus, the associa- 
tion of paint and varnish manufacturers has largely elminated 
deceptive use of the term “White Lead” by adopting the rule 
that it must be called “White Lead Mixture” if there is any 
other ingredient added, and if it contains less than 50 per cent 
white lead it must be referred to as “Whites.” 


Bribery of Employees or Agents: Perhaps the most insidious 
practice of all, and the most difficult to meet, because of the 
secrecy with which it is carried on. Many states have passed 
laws prohibiting “palm greasing,’ but for the most part they 
are wholly ineffective because they penalize both the giver and 
the taker of the bribe. The bribed employee will not disclose 
the fact voluntarily, and it is almost impossible to get conclusive 
evidence because he cannot be compelled to testify against him- 
self. The Federal Trade Commission was for some time active 
in investigating complaints of commercial bribery, especially in 
the ship chandlery field, and had 84 cases under review when 
the Circuit Court decided that the subject matter was not inter- 
state commerce, thus removing it from the Commission’s jurisdiction. 


Individual concerns can do little to check the practice, once 
it has become established. In a number of instances, however, 
trade associations have made considerable headway against the 
evil by adopting standard codes of practice, subscribed to by 
all the leading concerns in the industry, and made public. The 
moral effect of such a code has considerable weight if it is 
backed up vigorously by the suspension or expulsion from the 
association of members who do not live up to it. It also gives 
the more weak-kneed of the brethren an opportunity to resist 
demands for this form of backsheesh, because they know that 
other decent houses are not likely to offer it. Many concerns 
who yield to such demands do so unwillingly, but feel them- 
selves forced to do so in order to get the business. If they 


16 


Survey and Study of Competitive Trade Practices 
in 239 Different Lines of Business 


SECTION TEN. 


know, however, that no rival is likely to run the risk of violating 
the code, they gladly seize the chance to clear the situation up. 


M. Q. Macdonald, Esq., of the Unfair Competition Bureau 
established in Washington by the Paint and Varnish Industries, 
writes: 

“The elimination of this evil was the underlying cause of the crea- 
tion, five years ago, of the Unfair Competition Bureau—a connecting 
link between the Government and the industry. A proceeding based on 
this practice in the paint and varnish industry is no longer a reflection 


on that group of manufacturers, but an indication that they are ready 
to fight for the right and opportunity to get business honestly.” 


In the same way, some trade associations have met the prac- 
tice of offering presents or bonuses for pushing particular goods, 
to jobbers’ salesmen or retail clerks, with the knowledge and 
consent of their employers. This practice was condemned by 
the Federal Trade Commission in the Kinney-Rome bedspring 
case, but the Circuit Court decided that it was not illegal if 
done openly, with the employer’s consent. Co-operative action 
along the line of establishing standards of practice and forcing 
gradual adherence to them appears to be the only effective 
method of dealing with the practice. 


(For a more detailed discussion of this practice, see the ar- 
ticle by Forest Crissey, Saturday Evening Post for February 
28, 1914, reprinted in Hearings Before Senate Committee on 
Interstate Commerce on Bills Relating to Trust Legislation, 
63rd Congress, 2nd Session, Vol. I, page 177. For a discussion 
of trade association activities in general along this line, readers 
are referred to the “Book of Business Standards,” by J. George 
Frederick, published under the auspices of the Commercial 
Standards Council (Nicholas L. Brown, New York), “Trade 
Association Activities and the Law,” by Franklin D. Jones 
(McGraw Hill Publishing Co., New York), and the Department 


of Commerce publication entitled “Trade Association Activi- 
ties.’’) 


Trade Practice Submittals: Several years ago the Federal 
Trade Commission adopted the policy of occasionally inviting 
the leading members of an industry to confer for the purpose 


17 


Survey and Study of Competitive Trade Practices 
in 239 Different Lines of Business 


SECTION TEN. 


of defining unfair trade practices in their own line, and to make 
recommendations which the Commission might informally con- 
sider in passing on future complaints. To date some fifteen of 
these “submittals” have been held, including the manufacturers 
of ink, celluloid specialties, knit goods, paper, oil, rebuilt type- 
writers, band instruments, gold and silver knives, and so follow- 
ing. Many of these meetings have resulted in the drawing up 
of standard codes of practice, which are made public by the 
Commission and by the industries themselves. 


The trade practice submittal, however, is purely a voluntary 
affair, and at least one member of the Commission believes that 
it should be given a definite legal standing as the best means 
yet devised for bringing about a proper co-operation between 
the Government and business to eliminate trade practices recog- 


aized as unfair. In the minority report submitted to Congress ~* 


by Commissioner Nelson B. Gaskill, December 1, 1924, he says: 


cad 


“In addition to the change from the formal judicial method, the trade 
practice submittal or conference might well be raised from its informal 
- position to a status in which it would become the most effective means 
of affording relief from the use of unfair methods of competition. At 
the present time the trade practice submittal is a device created by the 
Commission, the weakness of which is indicated by its very title. Real- 
izing the impossibility of an agreement between the Commission and a 
business group for the elimination of an unfair method of competition 
by action of the individuals composing the group, instead of calling this 
meeting a “conference” it has been designated as a “submittal.” In 
practice whenever a group in the business world becomes itself conscious 
of practices of which it desires to be rid for the betterment of its opera- 
tions, it applies to the Federal Trade Commission for a conference in 
which the industry under the control of its own representatives attempts 
to crystallize and define its own concepts of the practices which consti- 
tute unfair methods of competition. Of course the Commission has 
nothing whatever to do with standards, nor with such questions as 
agreement on ethics, or codes of business relations, but attempts to keep 
these discussions within the limits which would be prescribed by the 
power of the Commission to declare conduct unlawful. The results of 
these conferences are shown in resolutions adopted by the representa- 
tives of the industry covered, which are then published if and when 
approved by the Commission, for the guidance of the industry. The 
Commission endeavors so far as it can to support the resolutions of 
such a conference by accepting these declarations as statements of the 
opinions of the trade, using such statements as evidence in support of 
complaint against others in the trade who do not accord with the ma- 


18 


® 


@ 


Survey and Study of Competitive Trade Practices 
in 239 Different Lines of Business 


SECTION TEN. PRICE-CUTTING AND UNFAIR COMPETITION 


jority or refuse to reform their practices in response thereto. It fre- 
quently happens that these practices of which industry desires by its 
own motion to be rid, are such that it is exceedingly difficult for the 
Commission to bring the evidence in support of its complaint issued 
against violators of this trade established rule, within the requirements 
of the common law rules of unfair competition. The result is that the 
splendid effort on the part of a business group to advance its methods 
and practices may be defeated by the action of two or three or a minor- 
ity of the trade because the expression of the majority is in such form 
or reaches to a matter which the Commission may not enforce as a part 
of the accepted law. 


“Nevertheless this trade practice submittal contains the germ of an 
effective and voluntary co-operation among business men for the ad- 
vancement of their own methods and practices, which is an expression 
of self-government in such high terms that it should be met and encour- 
aged in every possible way. If the Commission were authorized to enter 
into a formal conference with such a group and if the expression of 
that group representing a majority of an industry could as a result of 
the approval of the Federal Trade Commission, constitute as it were a 
law merchant which would be prima facie evidence of the rules of fair 
competition as established in and by the industry itself, which a court 
would enforce by sustaining an order of the Commission against a vio- 
lation of it, two results of the greatest value would be at once obtained. 
The ideals of business methods and practices would be expressed by 
industrial groups encouraged to do so because of the possibility of an 
effectuation of their ideas through authoritative and official agencies. 
And insofar as this forward movement might be made as a voluntary 
act on the part of industry the efforts of the governmental agencies 
would necessarily be relegated to their proper places, which are that of 
co-operation with and assistance to the citizen insofar at least as the 
citizen himself moves forward to the accomplishment of the common 
ideal. It is unnecessary to add that such a recognition of the trade 
practice conference would greatly reduce the necessity for dealing with 
individual cases and would tend to an expedition of processes as well 
as a reduction of cost.” 


Since action by Congress would be necessary before Com- 
missioner Gaskill’s proposal could become effective, it may be 
said to rest on the lap of the gods. At least, however, it is a 
constructive suggestion worth serious consideration as a means 
of putting some of the force of law behind standard codes of 
practice which now must mainly rely upon moral suasion for 
enforcement. 


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SUPPLEMENTARY NOTES 


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Milwaukee, U.S.A. 


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